Pollution Credits Stoke Trader Hiring Wave at Banks (Update1)
By Mathew Carr
June 28 (Bloomberg) -- George W. Bush, who's lately warmed to the notion that nations must cut greenhouse gases, has stopped short of endorsing mandatory caps. That hasn't prevented the world's biggest banks from plotting ways to eventually rake in winnings off emission limits in the U.S.
The banks are rushing to hire traders for the U.S., betting it will enact caps, combined with emissions permit trading, after Bush leaves office in January 2009. In the European Union, emissions trading tripled in value to $24 billion in 2006 from a year earlier, when the market started, World Bank figures show.
``The growth is phenomenal,'' says Seb Walhain, who runs the world's biggest emissions trading desk at Fortis, Belgium's No. 1 bank.
The U.S., which produces more greenhouse gases than any other country, promises to be an even bigger market, says Stephen Welham, a trader at Ambrian Capital Plc in London.
``The EU emissions trading scheme is going to look like a sideshow to the U.S. and other embryonic programs in a few years' time,'' Welham said.
Europe's cap and trade program provides incentives, through permit trading, for companies to reduce emissions such as carbon dioxide that cause global warming. Heavy polluters have to buy more emission permits when they exceed their cap, while cleaner companies profit by selling them.
Bush opposes these programs, which started with the United Nations' 1997 Kyoto Protocol, citing costs to the U.S. economy of mandatory caps and China's refusal to agree to them. In May, Bush called for a new round of global talks to set voluntary goals to curb global-warming gases.
Prices Plunge
Traders say a new U.S. president will reverse course and support cap and trade bills now in Congress.
``There's been a change in sentiment in the U.S. favoring emissions trading,'' says Richard Sandor, creator of U.S. Treasury futures at the Chicago Board of Trade and chairman of Isle of Man-based Climate Exchange Plc, which owns Europe's biggest exchange for trading permits.
Traders didn't fare well in the first three-year phase of Europe's program, which ends in December. Regulators handed out 6.7 percent too many permits in 2005 and 2006 compared with actual emissions in those two years.
Prices plunged to 8 euro cents (11 U.S. cents) a metric ton in June from more than 32.05 euros in April of last year. In 2007, regulators have been slashing the number of permits they provide for the EU's 27 nations, and forward prices jumped 79 percent to 21.07 euros on June 26 from Feb. 20.
300 Percent Returns
Walhain, 35, says banks are now snapping up low-cost permits in developing countries such as China for use in the U.S. once it begins trading. The permits, awarded by the UN, are priced to attract overseas investors for environmental projects. In March, Morgan Stanley hired Olivia Hartridge, a former emissions trading regulator in Europe, to hunt for these UN permits.
``Investment today could earn a 200 percent to 300 percent return over the next six years if politicians put into place the necessary legislation,'' said Guy Turner, director of London- based New Carbon Finance, which tracks emissions investment. The federal U.S. market will probably start after 2011 and could be valued at $50 billion by 2015, New Carbon Finance estimated today.
Goldman Sachs Group Inc., Barclays Plc and other firms are backing a $26 million development to reduce greenhouse gases from an SRF Ltd. factory in India that makes air-conditioning chemicals. The UN is awarding the project an estimated 311 million euros in permits over five years. Banks are buying them for less than 8 euros apiece, according to World Bank data, about a third of the price in Europe in June.
U.S. Power Contracts
Traders say they plan to package some of these UN permits with power contracts in the U.S. after it adopts emission caps. As utilities raise rates to cope with new regulations, the UN permits will help traders sell power contracts at lower prices and boost their profits, according to Walhain.
``The value from buying UN permits now is massive,'' he said. Banks and investment funds may spend $18 billion on UN and other credits through 2012, New Carbon Finance said.
U.S. banks are now playing catch-up to the Europeans in the trading gold rush. Brussels-based Fortis, a leader in the emissions market, with 15 traders, is adding offices in Hong Kong and Houston to set up the world's first 24-hour desk. Goldman Sachs, the world's most-profitable securities firm, began trading emissions in 2005.
New Emissions Traders
``Goldman Sachs is taking the U.S. emissions market very seriously,'' says Magid Shenouda, the London-based head of natural-gas, power and emissions trading at the New York-based firm. ``The guys who pioneer markets don't necessarily become the market leaders.''
Citigroup Inc., the world's biggest bank, started emissions trading in May.
``We're not as quick as the quickest and not as slow as the slowest,'' said Jeffrey French, a Citigroup spokesman based in London. Bank of America Corp., the second-biggest U.S. lender by assets, expected to begin trading in June.
Traders have a lot riding on the U.S. They earn an average salary plus bonus of about 213,000 pounds ($421,000), with the best of breed pocketing more than 1 million pounds, said Christopher Lascelles, a carbon market specialist at recruiting company Ruston Wheb in London.
The failure of lawmakers to enact trading in the U.S. would hurt the returns on all of those permits, said Gerhard Mulder, a derivatives marketer at ABN Amro Holding NV, and might damage those bonuses too. |
