Talk About Investing in Hot Air

"A series of futures contracts will be listed by end-October, early November," ECX Chief Executive Peter Koster told Reuters after a presentation on the contracts at the 25th annual conference of the Swiss Futures and Options Association.

The offering beats Germanys power bourse, the European Energy Exchange, and Austrian EXAA electricity market to the punch. They are also planning CO2 contracts.

Koster said the ECX was in talks with these and other markets about electronic links giving traders and investors access to the futures on ECX, which is a wholly owned subsidiary of the Chicago Climate Exchange (CCX).

The contracts will be listed on the electronic platform of London's International Petroleum Exchange (IPE), creating the first European market for greenhouse gas emissions trading.

HEDGING AND TRADING

Koster rebuffed criticism that utilities and other firms directly affected by the upcoming EU rules on CO2 reductions would be the main investors in the emissions market.

He said there would be opportunities for more speculative traders too who could for instance pick up the contracts before expected weather swings which would typically increase CO2 output and as a result demand for hedging.

"There is a correlation between energy consumption and emissions - emissions would go up in a heatwave just like the price for Brent crude oil would go up," Koster said.

He added that created a natural link between IPE products and carbon contracts.

With CO2 output capped under the EU rules, demand for CO2 futures would also rise as economies grew, he said. Under the rules, firms which overshoot their targets will be allowed to buy spare quota from firms which undercut theirs. Koster said the market would basically be twofold.

One application was for firms seeking to comply with EU efforts to meet Kyoto protocol obligations to curb greenhouse-gas pollution, the so-called compliance market.

The other would be for traders taking positions before events such as severe weather changes and bullish GDP forecasts.

ECX commercial director Albert de Haan said he expected demand for the contracts to grow over time.

The EU will initially target only utilities and refineries, seen as the main CO2 polluters, with the new regime, widening its reach out to other sectors such as transport and chemicals by 2008.

Also, the rules also envisage a gradual reduction of the permitted CO2 target level, by three percent a year, which should result in fresh emissions trading opportunities.

The ECX will begin by offering one-year 2005, 2006 and 2007 futures as well as four three-month contracts. Cash products are to follow in 2005.

The products are the brainchild of Richard Sandor, founder of interest-rate futures some 25 years ago, and chairman and CEO of CCX.

The futures will be cleared by LCH.Clearnet Ltd.