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Euro carbon trading graduates to cash settlement

The completion last month of the first cash-settled forward trade on EU CO2 allowances is a big advance for the European emissions trading market (EU ETS). GreenStream Network (GSN) brokered the trade between counterparties Dresdner Kleinwort Wasserstein and Sampo Bank of Finland.

Forward trades on EU CO2 allowances were settled by the physical delivery of a specified amount of EU allowances from a seller to a buyer. This transaction, for a large volume of allowances at an undisclosed price, is the first time a EU CO2 emissions trade has been settled in cash, giving companies affected by the EU ETS a hedging tool against excessive CO2 movements.

?Cash-settled transactions provide price protection across the EU's 25 member states, allowing them to trade or protect themselves with cash-settled CO2 swaps,? says Karri Lehtinen, head of commodities at Sampo. ?CO2 hedging will be added to corporations' risk management practices.?

Without a fully fledged spot market, pricing the trade wasn't straightforward. ?The challenge was to find a market price for the valuation date,? says Jussi Nykanen, vice-president at GSN, which offers intermediary and advisory services in the environmental markets in Scandinavia and Germany. Exchange trading is expected in the next few months, with at least five exchanges looking to launch products based on the EU ETS.

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