What To Expect from the Environmental Commodity Markets in 2014

by Latham & Watkins LLP
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Jean-Philippe Brisson is a partner in Latham & Watkins’ Environmental, Land and Resources Department and is Co-chair of its Air Quality and Climate Change Practice. He advises oil and gas, industrial and financial institutions clients on a wide range of energy and environmental matters, including carbon finance, renewable energy and commodities.

In this lw.com interview, he looks at two key trends that emerged in 2013 related to the US environmental commodity market and the outlook for 2014.

The Market for Renewable Fuel Credits

“In the US, there are two regulatory programs that require blenders and refiners to mix a certain percentage of biofuels into their traditional supply of crude oil,” said Brisson. “We’ve seen a number of issues in 2013 with the market. By the account of a number of market participants and the relevant government agencies — the markets have significant design flaws, which make it extremely difficult to comply with the federal-level programs starting in 2014 — and in some cases, according to several market participants, simply impossible to comply starting in 2015.”

“As a result of these flaws, we’ve seen some significant increases in market prices in 2013,” said Brisson. “In particular for one type of RIN (Renewable Identification Number) credit, we’ve seen prices go up by a multiple of 15 during a six-month time period. That price increase has resulted in a number of new participants entering the market, including speculators and market makers. It also resulted in calls for program reform and allegations of certain improper market behavior that could constitute abuse of market positions, for example.”

“I think this market will continue to see some significant developments in 2014 and potentially a regulatory change to the program that would ease pressure on prices,” he added.

The Greenhouse Gas Emissions Market

“On January 1, 2013, California started its cap-and-trade program that applies to greenhouse gas emissions in the state and greenhouse gas emissions associated with energy that is imported into California. We’ve seen a number of auctions and we’ve seen really good liquidity in the market — OTC and exchange-based transactions,” said Brisson. 

“There are a couple of things to keep in mind in connection with the California market,” he added. “The first is that California has adopted position limits for its cap-and-trade program that are similar to those contemplated by the CFTC for commodities forwards.”

“The second thing to keep in mind is that the program has a scope that is slightly more expansive than most everyone would expect,” said Brisson. “For example, power that is imported into California is regulated by the program. In 2013, we’ve already seen some indication that the California Air Resources Board is taking some measures on the enforcement side with respect to those import transactions.”

“One of the things to watch out for in 2014 involves RGGI (Regional Greenhouse Gas Initiative), the cap-and-trade program for greenhouse gas emission that has been operational for several years in the north eastern United States,” he explained. “This program was essentially dormant for a number of years because the cap was set at a high level and the market was long. But starting this year in 2014, it was decided that the cap would be reduced by almost 50 percent, and as a result, prices have been going up a little bit already. So I think that many market analysts and market participants expect that prices will continue to go up in 2014, and they expect to see more liquidity and activity on the trading side.”  

For More Information

For more information, listen to the 60-minute pre-recorded webcast entitled “Update on 2013 Derivatives Market.” JP Brisson and other partners at Latham provide a year-end review of regulatory developments in commodity and derivatives markets and address what can likely be expected in 2014. Topics covered in the webcast include banking, CFTC derivatives, documentation, CFTC/FERC enforcement, investment companies and advisors, EMIR/MIFID, emissions and energy.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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