henry derwent interview 03.07.11

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POLICY, TECHNOLOGY AND MARKETS 7 March 2011

Argus Media Ltd 2011

US Carbon

Argus Q&A: Henry DerwentHenry Derwent is president and CEO of the International Emis-

sions Trading Association (IETA), which is hosting Carbon Forum

North America, a two-day conference on the status of US carbon

policy and markets on 14-15 March in Washington, DC. He

previously served as international climate change director for

the UK government, where he oversaw the UKs role in interna-

tional negotiations, in the G8 and in other forums. Derwent was

involved with developing greenhouse gas trading in the UK and

Europe from its earliest days. He previously had responsibilities

for all aspects of climate change and sustainable energy in the

UK as well as air quality and industrial pollution control. In this

interview, edited for length and clarity, Derwent talked to Argus

about the direction of US and global policy and markets.

Argus: What does the failure of Congress to pass climate

legislation last year mean for the development of US carbon

markets?

Derwent: Obviously it is a great disappointment for those of us

who are interested in seeing progress toward action on climate

change taking the form of a price on carbon and the use of

market incentives and market instruments.

In a way the disappointment is greater because actually theidea made more progress than many thought that it would.

You would not have found many people I think even the

optimists who would have bet that a bill covering 85pc of the

US economy using a cap-and-trade scheme would have got

through the House.

The Senate was always going to be a difficult test. The really

disappointing thing is the manner in which the last few months

were played out, such that together with the general tenor and

approach of many new members of Congress coming in, we

are clearly looking at some years before we are going to be

able to look at this sensibly again.

Argus: Has the way things played out in the US last year had

any effect on the EU market?

Derwent: Not the EU market. It is an additional source of pres-

sure on the Clean Development Mechanism (CDM) market.

Although there was a long way to go before the shape of any

offset programs, and in particular the types of methodologies

which would be used by a US offset program, were clear, there

were quite a number of people used to providing a throughput

of Clean Development Mechanism projects to the European

market who were looking forward to the notion that there would

be considerably more demand.

There may still be some demand from California and one or

two other places around the world. But it has been a disap-

pointment for those in the international part of the market,

particularly those in developing countries or with carbon reduc-

tion projects which they were hoping to sell into an expanding

global market, which is going to take longer to expand.

Argus: You mentioned California, which along with a few others

is still moving ahead with cap-and-trade. But at the same time

some states, particularly in the Midwest, are stepping back

from emissions trading. Is California still going to be a mean-

ingful market?

Derwent: Do not forget California is not only operating on its ownbut also as part of the Western Climate Initiative (WCI). That

includes British Columbia, where the new premier seems to

be confirmed in favor of emissions trading. That also includes

Ontario and Quebec, which are both moving pretty fast toward

making the WCI a reality. Obviously it is disappointing news the

Midwest governors seemed to have stepped away. But not an

awful lot had been done by the Midwestern states recently. This

is politics.

We are in a sort of down curve. There are a number of RGGI

[Regional Greenhouse Gas Initiative] states that are going to

have to put a lot of effort into safeguarding their progress. The

Northeast is a little different from the tenor of opinion across thecountry as a whole and in Washington as well.

Continued on p2

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Argus: What are your thoughts on how the EU is responding

to the recent electronic theft of about 4mn emissions trading

scheme (ETS) allowances?

Derwent: Talk about shooting ones self in the foot just at a

time when it would have been great for the European Union to

display not only that the emissions reduction scheme there was

actually saving emissions but that it was working well and was

capable of dealing with any market oversight issues. What we

got was quite the reverse, and it is irritating because the prob-

lem is essentially predictable.

We warned them about a year ago that we were very worried

about the level of registry security. There are 27 separate regis-

tries. It was said about a year ago that you could just open an

account on the Danish registry without any checks whatsoever

being done.

All you needed to do then was get a hold of somebody

elses allowances, by hacking passwords or whatever, and if

there was poor security there as well, you were in. That is what

a number of people worked out and that is what happened. It

shows that when you create an EU instrument which has got

real-world monetary value, you need to put locks and bolts

around it because otherwise there are people who will steal it.

The people who saw the value for the purposes of theft were

a bit smarter and a bit quicker than the authorities who treated

this as if it were just part of the separate operations of 27 differ-

ent environment ministries across Europe.

Argus: What lessons are there for US markets to take on board

to prevent this from happening here?

Derwent: Number one, do not multiply the registries unneces-

sarily. If WCI does go ahead as planned that could be a real

issue for them. Second, something that is not an issue in the

United States, is not to have a value added tax system where

rates are different between different countries and it is possible

for somebody to collect the tax at one rate and pay at another

and pocket the difference.

These are two if you like self-inflicted wounds: one of registry

security and one of poor tax procedures. And they have led to

some pretty unpleasant headlines. I have to say however this

is not the first nor the last time that electronic trading schemes

and registries have been hacked. NASDAQ had some suspi-

cious activity just a couple weeks ago.

It shows what happens if you find there are places in the

system which are unguarded.

Argus: What impact will the EU decision to ban offsets from

certain industrial gas projects have on the market?

Derwent: You have got a lot of people with different views on

this and correspondingly different positions on whether the EU

was right or was not right to close down a potentially increased

source of supply.

Not a huge increase of supply, most of the emissions reduc-

tions units from those cases had already hit the system. It all

depends on what you feel about what supply and demand is

going to be in Europe, and to a lesser extent in the CDM world-

wide, going through to 2020 or beyond. It is good that there is

attention being given by the [European] Commission to making

sure there is sufficient balance of supply and demand to create

liquidity and create a market that will work.

On the other hand there is always deep concern when

people feel they have been encouraged by government or

public authorities to invest in a particular type of instrumentin the expectation that it will saleable in certain jurisdictions,

and then they find it has all changed and it is not saleable

anymore.

I think probably everybody is dissatisfied, which probably

means the commission has not done too badly. But if you see

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Henry DerwentContinued from p1

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a future whereby a market manager or government body in

charge of the market decides from day to day without much in

the way of prediction or warning that they are suddenly going to

close the doors to one type of transaction or class of commod-

ity in that market, then that will increase political risk. There is

no doubt about it.

Argus: What do you think of the approach Australia recently

proposed, starting with a carbon tax for three years or so and

then moving to a cap-and-trade program?

Derwent: Well that is exactly what they were going to do before.

Everybody seems to have forgotten that. That is a sort of clas-

sic reaction. It is actually the same the UK government has

done for its carbon reduction commitment.

The Australian government has to think very hard about

actually introducing something which is effectively a tax

when maybe all it should be looking for is a ceiling on price. I

understand what it is doing. We urged the government to be

a bit more bold and to move reasonably fast. Most people in

business in Australia one way or the other have got the general

idea about this.

Argus: What did you think of what came out of the UN talks in

Cancun in December, such as the reducing emissions from

deforestation and forest degradation (REDD) program?

Derwent: I personally think that Cancun was a bit more dis-

appointing than most people. But on the other hand I think

Copenhagen was not as bad as other people said it was.

The main things that came out of Cancun were: a degree of

cementing the Copenhagen accord into the UN system, a sort

of renewed statement of faith in the UN system, I hope that will

be justified; some progress on certain issues such as carbon

capture and sequestration and CDM reform; the avoidance of

steps backward from the point of view of private finance, the

reference to new market mechanisms is still there rather than

completely airbrushed out. REDD and the forestry stuff, I think

that was a bit disappointing. A year ago or a year and a half

ago we were probably expecting more progress on REDD than

we got at the moment.

But I think it got caught up with the uncertainty about market

mechanisms generally.

Bringing all these threads together from our perspective is

what the Carbon Forum North America event is all about. After

sort of sitting back and licking ones wounds over cap-and-

trade, we want to stay in Washington to be seen to say this has

not gone away, you have to keep thinking about this stuff.

Just because there are a bunch of people in Congress who

do not believe there is a problem, let alone this is the right

solution, does not mean that those of us who believe there is

a problem and it needs to have a solution and this is the most

business-friendly solution should not keep going and working

on where to go next. That is essentially what we are trying to do

here.

Henry DerwentContinued from p2

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henry derwent interview 03.07.11

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