Denmark and the UK are the only countries to have set up government-backed emission trading schemes. The Danish scheme was set up in 2000, while the UK programme started in April 2002 – although forward transactions have been conducted since September 2001.
The swap is also significant because there is currently no regulation governing the fungibility of cross-border deals between government-mandated schemes. This means a UK allowance cannot be physically moved on to a Danish allowance account and vice versa. But both Shell and Elsam believe there is value in the scheme.
The Danish scheme places restrictions on the banking of allowances when the trading scheme ends in 2003. But UK allowances are bankable until 2007 and, with some contingencies, are also bankable into the first Kyoto Protocol compliance period of 2008-2012. So swapping Danish allowances for UK allowances allows Elsam to bank some emissions assets for future compliance periods.
For Shell, Garth Edward, trading manager, environmental products with the firm in London, said there are a number of commercial rationales for the swap. “A company that was long in the UK and is short in Denmark would be able to transfer its effective length into Denmark,” said Edward.
Shell is active in both markets, having taken on a voluntary emissions cap under the UK scheme and a mandatory cap in the Danish one.
Michael Intrator, managing director, global emissions markets at Natsource, claimed the transaction represents the future of global emissions trading. “The swap demonstrates that trades in government-backed greenhouse gas emission allowances between jurisdictions can make sense even in the absence of clear rules of fungibility. This is recognition that companies can utilise the global trading market to achieve economic and environmental objectives,” he said.
Greenhouse gases, which are mainly produced by the burning of fossil fuels to generate energy, are blamed by many scientists for the dangerous warming of the planet. Emission trading is seen by many in the industry as an efficient market-based solution to such pollution. It allows businesses to buy and sell permits that allow them to emit gases within a declining, overall limit. Energy-efficient companies can sell their unused permits to less efficient ones, thus providing a financial reward for environmental virtue.
The week on Risk.net, September 8-14, 2018Receive this by email