Carbon Trading and Correlation Complications

Angus Macleod (Presented at Energy Trading Conference, September 2007)

There has been a lot or work, papers and presentations in Australia on the possible NET schemes that might be eventually implemented, the implications they may have for GDP, there effectiveness in reducing emissions and even their possible financial impact upon electricity prices and industry in general. However most modelling has been conducted with the benefit of a range of simplifying assumptions and very little focus has been placed on what the introduction of emissions trading in Australia might mean for energy traders, risk managers of utilities and the commercial and industrial sector.

The objective of this presentation is to look at the risk management implications and issues likely to arise for risk managers in the Australian energy, commercial and industrial sector with particular reference to experiences overseas and complications that arise due to correlations between different commodities and the fundamentals that drive their supply and demand.

  1. Energy Edge who we are and our E3 International Alliance Energy Edge is a company that specialises in commodity market risk management services and business activities. It utilises the unique skill sets of its human resources to help clients meet their need for increasingly sophisticated risk management, trading, market, commercial and corporate finance related issues in energy, environmental and other commodity markets.

    Energy Edge and E3 International have formed an alliance that allows the parties to bring together their unique set of environmental economics, commercial, trading and risk management skills with the objective of delivering a higher quality and more comprehensive service in this area than is currently available in Australia. E3 International and Energy Edge have developed a full Carbon risk management service to be provided to Australian utilities, industry and financial institutions. This service is enterprise wide covering the full range of Carbon risk management services from direct and indirect exposure identification and quantification to the establishment of policies, procedures, systems and skills necessary for the active risk management of Carbon related risks via the trading of Emission Allowances and/or Certified Emission Reductions.

  2. First rule of commodity trading and risk management Understand the nature of the commodity, its key drivers and supply and demand fundamentals. Relative to electricity, Carbon markets have the benefit of being storable, bankable and increasingly internationally tradable through the growing CER market. Storability and bankability means that forward prices should efficiently reflect the value of the commodity at different points in time through effective arbitrage trading and the concept of cash and carry.

Contact the author for further details.