July 24, 2000

DERIVATIVES WEEK

IT’S A GAS GAS GAS
SRNM LOOKS TO CARBON DIOXIDE FOR A NEW TRADING MARKET.
BY Jeremy Carter

Swiss Re New Markets is investigating the feasibility of trading carbon dioxide emissions credits. Chris Walker, associate director of environmental solutions in Zurich, said the reinsurer is looking at using derivatives or insurance products to buy and sell the right to emit units of CO2.

Swiss Re New Markets is looking at the products now to position itself to start trading next year. Walker believes that an intergovernmental conference in the Hague in November could clarify definitions, clearing the way for trading. In 1997, 180 governments agreed in principle to the Kyoto treaty, which called for emissions reductions of 5.2% below 1990 levels between 2008 and 2012 among industrialized countries. But specifics of the treaty still need to be worked out.

Although the Kyoto treaty is not slated to come into effect until 2008, some players think the trading market could be jumping before then. Neil Cohen, greenhouse gas broker at Natsource in New York, said some countries are moving independently of the Kyoto treaty to ensure the legislation can be implemented more quickly. These countries include the U.K. and Denmark. The European Union is separately attacking this problem. At the moment demand for CO2 trading comes from utilities and parties, for example, hedge funds, taking positions, he added.

Michael Walsh, senior v.p. at Environmental Financial Products in Chicago, said one of the most useful qualities SRNM can bring to the market is the ability to set standards. He said the company will be able to standardize documentation, data and the quality of derivative and insurance products. He added that SRNM will also be able to insure the performance of CO2 reduction projects, such as forest planting schemes. While the CO2 emissions trading market can currently be measured in the hundreds of millions of dollars, after the Kyoto treaty is ratified it will be in the hundreds of billions, he estimated.

Walker said that SRNM is also looking at offering CO2 derivatives linked to weather derivatives. For example, in a hot summer, a company might use air conditioning and hence emit CO2. A single structured derivative could hedge both these risks. SRNM thinks it can use its size to kick-start the CO2 market by warehousing the risk and hedging it against other parts of its portfolio.