"Backpacking! I had a great time travelling!" says Fenella, when describing her first move after graduating. This sense of adventure subsequently also took her into her current role: "I spent a number of years in brokerage houses and banks looking at energy derivatives. Carbon trades on the same exchange as oil, so I did a few carbon trades, and then got involved with a fund working in the area. As I got more and more interested in carbon, the mainstream energy markets were beginning to lose their lustre for me. So I started looking into who was setting up or expanding dedicated carbon trading desks, and went to Standard Bank because they already had some expertise in the area."
The Gateway asks Fenella to give us the basics on carbon trading and the work she does at Standard Bank: "Under the Kyoto Protocol, some countries have obligations to reduce their emissions and some countries are promised financial rewards for going green. The role of a bank, or other trading institution, is to enable this exchange of carbon credits for cash."
"But making these trades happen is only one aspect of what we do. The trade could be part of a project financing, or we could be acting as an intermediary for buyers of carbon credits - we might speak to a sugar company in Uganda that is planning on using waste sugar cane to generate power, and buy the carbon credits from them, which we may hold on our books, or sell on to another party." Such deals directly involving producers of carbon credits are classed as the "primary market" in carbon trading.
There is also a secondary market, in which Fenella and her team are also active, where carbon derivatives are traded. Many banks only get involved with carbon at this stage, but Fenella feels that the primary market expertise that Standard Bank has is invaluable for understanding the risks of, and therefore working effectively in, the secondary markets.
Wonders of the world
Fenella's Ugandan example is typical of work in this field - crossing continents is inherent to the carbon trading business: "It goes back to the underlying philosophy of the Kyoto Protocol, that is, it doesn't matter where in the world the carbon is saved as long as it's saved." Emerging markets in particular are key to carbon trading work because most carbon reduction projects are based in China, India or Africa. And so Fenella's carbon trading team are embedded in these regions: "There's three of us in London, one person in Lagos, one in Luanda in Angola, and a team in the Far East."
The importance of emerging markets to carbon trading work make Standard Bank a natural home for specialists in this field because of its experience in working with these nations: "We understand risks in countries where other banks fear to tread. Take Africa. Other banks aren't as involved as us because they simply don't have the same number of people on the ground - for example, we're the largest retail bank in Uganda and have 72 branches in the country. We really understand our clients who are sugar farmers, cement companies or power generators. We also have an enormous foothold in the Asian market because we are 20 per cent owned by ICBC (Industrial and Commercial Bank of China)."
There's breadth of experience as well as in international range in the coverage Fenella's team offers. Each person has several different roles - Fenella gives herself as an example: "I do both structuring when a deal is being set up and sales trading once it's done, so I can take a transaction right from its roots all the way to the end." Among the team, some have worked for governments on climate change or helped write the Kyoto Protocol itself, while others have got stuck into environmental issues at a more practical level: prior to joining Standard Bank one member was involved in projects "taking the methane from swine effluent to generate power, which was then used to keep the pigs warm over the winter!"
Moving swiftly on, we ask Fenella for her predictions for the carbon markets in the future. Her first thought is that those who work in them will become more specialised: "You don't see equities desks operating globally for other commodities. You see them concentrating on certain geographies. Now whether we'll concentrate on geographies or different types of credits, is something we don't know at the moment."
This specialisation will be a product of what Fenella sees as the inevitable growth of the sector: "It's still a young, new market, but no-one imagines that's where it's going to stay." She raises the issue of the expiry of the Kyoto Protocol carbon trading provisions in 2012 and the fact that there are currently no clear indications as to whether they will be renewed or replaced. However, Fenella believes that carbon trading will continue to happen, but thinks that there is a possibility that the market will fracture into continent-based trading systems dealing in locally specific types of carbon credit - for example, "forestry will be in some of them, industrial gases will be in others." As she points out, such a shift could be seen as carbon's coming of age as an energy commodity: "We don't trade one grade of oil worldwide. We trade very different grades of oil depending on your requirements, depending on geography, depending on cost. There's nothing to say we can't do the same with carbon."
While we're thinking about the future, we ask Fenella what undergraduates interested in getting into carbon trading should be doing. Fenella points out how much publicly available information there is on carbon trading and suggests that students start by reading up: "On the UNFCCC website you can find details of every single project that has gained carbon credits." And it's an exciting time to get involved: "We're working hard on the initial deals, but people who are currently studying and who will be coming into the workplace in the next fifteen years are going to make it considerably bigger and, hopefully, more lucrative." As with any area of banking, making a profit is key, but there's room for some idealism too: "Most people want to leave the planet the same, or possibly in a slightly better, state for their children - and it's in the hands of current undergraduates to keep this impetus going."
Carbon trading: the legal framework
UN Framework Convention on Climate Change (1992): The UNFCCC was established in 1992 at the Rio Earth Summit. It is the overall framework guiding international climate negotiations. Its main objective is "stabilisation of greenhouse gas concentrations in the atmosphere at a level that would prevent dangerous anthropogenic (man-made) interference with the climate system".
Kyoto Protocol (1997): The Kyoto Protocol specifies emission obligations for certain industrialised countries and defines the three Kyoto flexible mechanisms: JI, CDM and emissions trading. It came into force on February 16, 2005.
Three carbon trading mechanisms were set up under the Kyoto Protocol:
Joint Implementation (JI): Emitters can gain carbon credits by setting up carbon reduction projects in other countries.
Clean Development Mechanism (CDM): Mechanism for project-based emission reduction activities in developing countries. Carbon credits are generated from projects that lead to emissions reductions that would otherwise not occur.
Emissions Trading: Allows for transfer of emission allowances across international borders or between companies covered by a cap-and-trade scheme.