What it takes for Singapore to be a carbon hub

Business Times 24 Mar 08;

SINGAPORE has made clear its ambition to be a regional carbon hub. What does this entail?

According to the Economic Development Board (EDB), the 'carbon services ecosystem' includes a variety of different firms.

It involves not just project developers, verification and monitoring firms, or carbon consultants - who help take companies through the process of generating carbon credits.

Not is it just the hedge funds, banks or other intermediaries who invest in projects or buy and hold credits, betting that prices will rise.

It also includes think-tanks and international organisations, technology providers like renewable energy or waste management firms, and - perhaps the most visible of them all - carbon traders and exchanges.

Goh Chee Kiong, head of the Environment and Clean Energy unit at the EDB's New Business Group, says that Singapore's infrastructure, skilled manpower and reputation as a financial centre will be applied to this sector. The country's strong push into energy - through successful courtship of key names in the solar, wind and biofuel industries - means that a cluster of clean-tech companies will be ready to service projects in the region, including South-east Asia, China and India, he says.

This is timely. While it is questionable whether Singapore can establish a carbon trading centre in the next few years, industry players say that the starting point is to attract as many diverse members of a carbon community as it can.

Technology providers, especially, are critical. Most projects require technical solutions, whether it is more efficient power generation or ways to capture and dispose of methane and other gases.

Furthermore, many early carbon projects were in lucrative sectors, like the removal of hydro-fluorocarbons (HFCs) - highly pollutive industrial gases - but these are now gone. According to Erik Chan of EcoSecurities, as the low-hanging fruit is plucked, the second wave of projects will be more complicated and require more technology content.

Singapore could also host firms that monitor or manage forests, if and when opportunities to earn carbon credits via reforestation emerge.

As for financiers, Singapore is already home to several of the banks that lead in carbon trading and brokerage - such as Barclays, BNP Paribas, Credit Suisse, Deutsche Bank, Fortis, Merrill Lynch, Morgan Stanley and Mitsubishi UFJ.

Still, establishing a hub for carbon trading is a different proposition. 'I don't see why there is any compelling reason for a carbon hub in an area with no demand,' says Marc Stuart, co-founder and director of new business development at EcoSecurities.

Since most of the end-buyers of carbon are in Europe, trading platforms in Asia would be superfluous, he says.

Singapore developed as an oil trading hub thanks to its massive amount of storage capacity as a bunkering port, but carbon credits are different - there is no underlying physical commodity. If anything, project-based credits are substitutes for EUAs (European allowances), which are traded entirely in Europe. Buyers who do come to Asia can do better by sourcing their credits through brokers, or by approaching sellers directly.

This could change if a strong voluntary market emerges in Asia - such as it has in Japan - or if Asian countries commit to reducing emissions.

Meanwhile, an independent carbon group in Singapore set up the Asia Carbon Exchange, an online platform where buyers meet sellers via an open auction of projects. Volumes are paltry so far, at just 3.5 million credits from over 20 online transactions, about 28 million euros (S$60.5 million) worth, but the group wants to ally with an established exchange to grow.

Generally, an exchange needs to provide smooth and transparent pricing. Individual buyers need to know who the seller is and what the counter party risk is. An exchange needs facilities to settle payments across borders. And it needs good liquidity - if there is high liquidity today but it dries up tomorrow, prices could collapse.

Carbon credits: How they help reduce GHG
Business Times 24 Mar 08;

What are carbon credits?

Each carbon credit allows the holder to emit one tonne of carbon dioxide equivalent.

Carbon credits have no physical underlying product - unlike derivative contracts like oil or grain futures, which are written on the actual commodities.

Rather, credits are created in two ways. The first type of credits are allowances, which are handed out to developed countries and effectively set a quota on their pollution.

The second type are project-based. They are created when an entity in a developing country completes a project that permanently reduces its greenhouse gas emissions. The project is verified by the UN, which issues credits to the entity. The entity can then sell the credits to developed country buyers.

The market exists because of the Kyoto Protocol, under which some developed countries, mainly in Europe and North America, agreed to cut their GHG (greenhouse gas) emissions by an average of 5 per cent from 1990 levels by 2012.

Who buys carbon credits?

End demand comes from two sources. The first and largest consists of compliance buyers, located mainly in Europe, such as power generators. They must buy credits to offset their emissions, if they are exceeding their allowances.

The second, far smaller, source comes from voluntary buyers - both companies and individuals - from the US, Japan, Australia or elsewhere, who want to help fight global warming (or give the impression they are doing so).

Some 23.7 million tonnes worth of voluntary credits were bought in 2006, compared to nearly 1.64 billion tonnes worth of UN-issued credits.

Where do credits come from?

The largest source is the European Union Allowances (EUAs), which are handed out to European countries based on the pollution quotas each state is allowed. 1.13 billion tonnes, or US$24.6 billion worth, of EUAs were traded in 2006.

The second source are project-based, such as under the Joint Implementation (JI) programme or the Clean Development Mechanism (CDM). About 500 million tonnes of project-based credits, worth US$5.5 billion, were traded in 2006.

How are credits traded?

Trading takes place on exchanges, like the European Climate Exchange, or the Chicago Climate Exchange.

They are also traded through hedge funds, banks, or other intemediaries, which aggregate credits from projects all over the world, structure them into portfolios, then sell them on to end-buyers.

Many funds also invest directly in projects that cut emissions, with plans to hold or sell the generated credits.

Further, buyers can purchase directly from sellers, though this may again be arranged through a broker, or an online auction platform, like Singapore's own Asia Carbon Exchange.

How does carbon trading help the environment?

The carbon markets are essential to setting a price for carbon. This is important because companies then recognise there is a monetary benefit from reducing their pollution, because they either need to purchase fewer credits, or can sell off excess credits.

The market exists because of the commitments from countries to cut emissions and the political will to follow through with these promises. While the market enables countries to meet commitments by buying credits from others, any efforts to fight climate change must begin with commitments from governments, companies and individuals.

Some say that a carbon tax would be more efficient to administer, and less vulnerable to lobbying by industry groups than a cap-and-trade system. Industry players counter that a trading system allows the free market to discover the price for emissions.