US Carbon
POLICY, TECHNOLOGY AND MARKETS 7 March 2011
Argus Q&A: Henry Derwent
Henry 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 UK’s 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 the
idea 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?
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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 own
but 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 the
country as a whole and in Washington as well.
Continued on p2
 Argus US Carbon — The Argus Interview
Henry Derwent
Continued from p1
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 one’s 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
else’s 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
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7 March 2011
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 instrument
in 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
Continued on p3
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 Argus US Carbon — The Argus Interview
Henry Derwent
Continued from p2
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?
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7 March 2011
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 one’s 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.
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