Carbon trade woos local power market operator and bourses

A race for carbon trading platforms heats up Romania’s new billion Euro market in CO2 credits. Report by Michael Bird

Romania’s carbon market has been in operation for over a year and local stock exchanges and Romania’s state-owned power market operator (Opcom) are wising up to the opportunities of building platforms for trade.
Opcom intends to set up a new platform as early as this year, while the Bucharest Stock Exchange (BSE) has also expressed interest in opening a facility for trading Carbon Dioxide (CO2) emissions credits.
Since 2009, Romania has been part of the EU’s scheme for carbon trading, where up to 12,000 industrial and energy polluters buy and sell CO2 emissions. These carbon credits take the form of European Union Allowance [EUAs], with each unit representing one tonne of CO2 produced, and are sold on an international stock exchanges, such as Amsterdam’s Climex or Paris’s Bluenext.
In Romania only the Sibiu-based electronic exchange Sibex has a platform for brokers to buy and sell carbon credits.
Romania’s polluters include power plants, metal products manufacturers and plastics producers. Many of these are state owned facilities, such as thermo-power plants Rovinari and Turceni.
A power plant, for example, agrees with the state that it can emit annually one million tonnes of greenhouse gas, which the Ministry of the Environment verifies. If the power plant emits under this quota, say 900,000 tonnes, the company can sell its remaining credits, worth 100,000 tonnes, on the carbon credit market. If the plant produces 1.1 million tonnes, it must buy the remaining 100,000 tonnes on the same market.
In Romania, Opcom intends to launch a simple trading platform for companies to auction off their carbon credits in a tailor-made system for the local market.
“It is difficult to compete with sophisticated trading platforms like Bluenext,” says Lucian Palade, director of electricity market surveillance and development, Opcom. “We intend to supply simple products and opportunities for those who want to buy and sell big volumes.” This will be accessible to all companies who open an account in Romania’s national registry and will target a large operator such as a steel plant which wants to sell off 10,000 credits in one shot to the highest bidder.
It will not be a daily market. “When we are requested by participants, we will organise auctions,” adds Rodica Popa, Opcom’s head of clearing mechanism and financial instruments.
Opcom will need approval from its parent, the Ministry of Economy, but at present there are no barriers to open a trading platform for carbon credits, which is why Sibex has been first to launch and the Bucharest Stock Exchange is interested. Sibex’s system allows the trade by brokers and financial institutions, who are registered in the National Securities Commission (CNVM).
Palade says that in the future Opcom could combine with other platforms which offer more sophisticated products. The Polish power exchange TGE last year created a similar relationship with the global carbon trading exchange NASDAQ OMX.
“There is a momentum for alliances,” says Palade. “The long-term ambition is to merge two illiquid markets into one more liquid market.”

First year in the black

Carbon credits are known as ‘black certificates’ to discriminate from ‘green certificates’ for renewable energy trading and ‘white certificates’ for trading in energy efficiency.
Since the beginning of 2009, Romanian companies have been trading 40 million ‘black’ credits. The business, potentially worth billions of Euro in transaction volumes, has attracted interest from big name brokers, such as Russian-owned and London-based Gazprom Marketing & Trading.
In the first year, one of the leading Romanian brokers in carbon trading, KDF Energy, helped trade around 200 million Euro. Brokers attend auctions for the larger deals, while small deals take place by direct appointment. “The biggest challenge is to make people understand and trust the market,” says Casiana Fometescu, development director at KDF Energy.
In 2009, Romanian firms generally sold their excess EAUs, rather than purchased the credits, argues Fometescu. One reason for this ‘under-quota’ trend is that manufacturers are producing less due to lower consumer demand. But this has not affected Romania too much, because the country’s operators began trading when the financial crisis was in full swing. “When the Romanian credit market opened, we were supposed to see a devaluation of the credits price,” adds KDF Energy’s corporate affairs manager Vlad Bolocan. “However, it seems that the European market was big enough to absorb Romania’s contribution, so no major or severe effects took place.”
Also traded on markets are Certified Emission Reduction [CERs]. Here, a company can invest in a project to reduce carbon emissions and then the Government can grant to the firm CERs, which represent the amount of tonnes of CO2 saved by the investment. One tonne of CO2 saved is equal to one CER. This can account for ten per cent of the company’s total allocation of credits.
“This helps when NGOs are trying to make a business case to companies,” says Bolocan. “If businesses invest in an environmentally friendly project, not only can they can get some good PR, but they can also attract some revenues through the sale of CERs.”
The current EU trading market will remain in place until the end of 2012. From then, the EU intends to levy higher penalties on polluters of greenhouse gases to reach its target of a 20 per cent drop in emissions by 2020, compared to 1990. The allocating and auctioning allowances will take place at an EU level and operators will have to buy carbon credits in auctions from EU member states. This new green tax will be redistributed to initiatives to reduce carbon emissions.
In Romania and other post-Communist countries, polluters will probably have a mixture of credits for free and others to buy. This is because these nations are still over-dependent on coal-based power and high penalties on their industry could cause a blow to the competitiveness of manufacturers.
For example, a concrete plant in Neamt county, Romania, must buy 1,000 credits or face penalties, while a similar operation 100 km in the Republic of Moldova pays zero to no one. Known as ‘carbon leakage’, this could distort a free market against Romanian business.
From 2013 there will also be a secondary market, where operators continue to sell and buy certificates, similar to the Bluenext, Climex and Sibex markets.

Hot air to sell

Romania has a massive excess of carbon credits to sell. Under the Kyoto Protocol, the country must reduce gas emissions by eight per cent based on figures for its 1989 industrial output.
For 2009, Romania has released around 37 per cent much less than the value agreed under the Protocol between 2008 and 2012, according to the Ministry of the Environment. This is due to the closure of polluting Communist-era factories, the rise of the service economy and the financial crisis.
This means Romania can sell Assigned Amount Units (AAU)s, for each tonne of CO2 it does not emit, to developed countries. This country-to-country system of selling is separate from the company-to-company trading that currently operates in the EU.
Romania must use the cash from these AAUs for green projects through the Green Investment Scheme (GIS) to help reduce gas emissions, such as rehabilitating heating systems in Communist-era blocks or promoting renewable energy.
Romania has been slow to take advantage of the billions available from the sale of AAUs. Experts says it is still possible. Reka Soos, director at Cluj-Napoca based eco-consultants Green Partners adds: “As soon as Romanian has legislation for GIS and enters the International Emissions Trading (IET) to conduct transactions, Romania can benefit.”

Copenhagen blues

The Copenhagen Accord signed last December between 190 countries failed to become a successor to the Kyoto Protocol to set international limits on greenhouse gas emissions.
However the agreement did establish a near-consensus on the need to tackle climate change on a global level.
At the conference, Romania followed the general EU opinion to set out a plan to reduce carbon emissions by 30 per cent by 2020, compared to the 1990 level, if the rest of the world also sets ambitious targets. “Romania has made an effort thus far and has earned its place in the community of countries that is a world leader promoting low carbon economies and will rightfully benefit from the advantages this will bring,” says Cosmin Briciu, environmental consultant, Green Partners.
But Romania was not willing to pull out its wallet for the EU’s 15 billion Euro post-2013 carbon emission-busting initiatives for developing markets – which is hardly surprising for a country now propped up by the International Monetary Fund and reeling from an eight per cent decline in GDP. “The reasoning was that poor EU states are not ready to finance other poor states outside of the EU to solve a problem that they themselves are struggling with,” adds Briciu.
The Copenhagen Accord only acknowledged that climate change existed, but offered no road-map for its remedy. The main argument is how developing countries can industrialise, while at the same time ensuring CO2 emissions do not increase to a degree which destabilises the environment. The west must assist the developing world with financial packages to help them fight climate change.
At the conference, developed countries only promised short term finance of seven billion a year over three years for poor countries.
But the accord set no time-line for when countries can draw up a legally-binding document with targets for reducing carbon emissions – although experts believe this will have to be agreed before the end of 2010 for a new system to be in place by 2013. Any new agreement is likely to see an increase in emissions cuts for Romania.
“Without such an agreement it is not clear how the ambitiously low carbon EU economy will do in the short term in a race with the high carbon USA or other regional powers who do not have binding emission targets,” adds Briciu. “In the medium to long term, however, the world is certainly heading towards a low carbon economy.”