Derivatives exchanges and industry trade groups, including the European Energy Exchange and a working group of the International Emissions Trading Association, are hammering out pricing guidelines for the European emissions market, a move widely seen as a precursor to the launch of an index and derivatives products. "We just need a trustworthy index and a little bit of warm-up time and then we can price options," said Benedikt von Butler, a broker at Evolution Markets, an emissions broker in London. The European Energy Exchange is talking to market participants and will be ready to launch an index by January, said Albert Moser, head of product development in Leipzig. One trader quipped, "Every exchange in Europe is interested in this." Meanwhile, the International Petroleum Exchange in London is working with the Chicago Climate Exchange to offer emissions futures, according to Mark Woodward, policy and compliance manager at the IPE and co-chair of the IETA working group. He declined further comment on the IPE's plans.
A cash-settled emissions credits trading market is set to kick off in the new year. Under the European Union plan, companies will be able to buy and sell carbon dioxide credits according to their emissions output as measured against pre-determined quotas.
David Foster, head of weather and emissions at Calyon in London, said, "I think this market will take off, because everyone has to play." Foster added, however, it will be up to the E.U. to make the market sufficiently robust via effective regulation. Otherwise, he warned, the nascent market risks deterring proprietary trading in emissions credits.
Most corporates are waiting on the sidelines until signs of a more liquid market develop. Shell, Powergen and Centrica in the U.K. have all executed small test trades. "We need to see more players and larger volumes traded more quickly before we really get involved," said one emissions trader at a U.K. power company.
