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Capital Markets

What price global warming?

Banks and exchanges are working to expand their commodity-based products to capture new opportunities that will arise from the burgeoning European carbon dioxide emissions trading scheme. The use of Isda documents is already boosting trade volumes. And banks are starting to lend against allowances as collateral.

Cut down or buy up

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FROM JANUARY 1 2005, the world's most ambitious programme for pollution control, worth potentially tens of billions of euros, will begin. Already banks, brokers, hedge funds and other traders are preparing to play, alongside end users such as power utilities and other corporations, in the European Emissions Trading Scheme (EU ETS). A substantial traded market in allowances is set to grow and policymakers hope that by putting a market value on reducing pollution, companies that clean up will be rewarded and those that do not will be confronted with clear direct costs.

Following the birth of this pan-European burden sharing agreement in October 2003, trading volumes of European Emission Allowances (EUA) quickly reached 500,000 tonnes in 2003 (each EUA is equal to one tonne of CO2) and have since risen to 6.3 million tonnes in the year to the end of November. Alongside the companies directly affected by the scheme, financial market players have quickly been drawn in.

Energy market correlation

Part of the banks' motivation is to understand the CO2 market because of its impact on other commodities that they are already trading.

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