Carbon trading agreement opens up a wealth of new opportunities

Bakers, CC and Hunton are helping businesses deal with global warming. By David Middleton

Last week world leaders, government ambassadors, industry figureheads and lobbyists converged on Nairobi, Kenya, for the UN Climate Change Conference. They were joined by a relatively small, albeit motivated, group of lawyers.

The resolutions from the conference, announced last Friday (17 November), will have implications that are sure to be profound. The resolutions will be as important, if not more so, than the Stern Review on the Economics of Climate Change, which generated worldwide headlines and, finally, brought the issue of global warming to the forefront of business and political minds.

The Nairobi conference is the first step in developing a policy to last beyond the expiry of the Kyoto Protocol in 2012. The US and Australia are the two biggest nations not to be signatories to the Kyoto Protocol. This has led to some interesting developments for firms practising carbon trading law.

Hunton & Williams, which has developed for itself a strong practice in all forms of energy trading, having acted for clients such as International Power, Gazprom and Constellation Energy, has taken a strategic decision to rotate assistants from its US-based energy practices to London, purely to gain experience on carbon trading emissions.

Renewable energy partner John Deacon explains: “Because the US isn’t part of Kyoto it doesn’t have any carbon trading system. But the country is currently the world’s largest emitter of CO2 and therefore has the greatest need for carbon credits. Increasingly law firms are ramping up their expertise and experience in this sector.”

US-based funds are increasingly becoming involved in carbon credit trading, and US-based multinational operations with plants in countries that are signatories to Kyoto, such as Constellation Energy, do have some involvement with carbon credit trading, and relationships brokered in Europe could well be lucrative back in the US.

In Australia Baker & McKenzie has developed a worldwide reputation as a leading energy and carbon credit trading practice. Like the US, as Australia’s companies wake up to the potential, the gains to be had for Bakers, which has a stranglehold on the market, are huge.

Bakers senior associate Paul Curnow said Australia was “going to be left behind in terms of getting access to the cheaper credits and the big projects”. That sort of economic motivation is going to spur governments and industry into action, generating legal work.

The country that will overtake the US as the largest emitter of CO2 gases is China. Already a strategic area of interest for law firms due to the investment and development opportunities, energy trading, especially carbon credit trading, could become an integral element of a successful Asian practice – a prospect that is certain to have many managing partners, from either side of the Atlantic, licking their lips.

“We started at a similar time so we’ve been learning at the same time as our colleagues in Beijing,” says Deacon. “It all hangs on big political risk and is subject to a political support mechanism, but the opportunities are enormous.”

Firms that have already helped to make the most of the developing China market include Bakers and Clifford Chance. Bakers advised environmentally focused investment bank Climate Change Capital on an $850m (£450m) (soon to be $1bn (£530m)) syndicated carbon fund established with Morgan Stanley, which took its advice from Clifford Chance.

Bakers secured the mandate through its connection to Climate Change Capital’s head of legal policy and general counsel to the fund Anthony Hobley. Hobley, who was profiled by The Lawyer on 18 September, is a former London-based Bakers senior associate and a man the legal community widely credits with writing the book on climate change and carbon trading law.

The transaction gives a glimpse into how the market will likely develop for law firms, in much the same way that project finance has developed with firms tending to align themselves with either project sponsors or project backers. Expect to see the magic circle firms working with their fund clients, while firms such as CMS Cameron McKenna, Herbert Smith and Norton Rose sweep up the trading companies. Credit sellers could be expected to go on with relationship firms, but in such a developing market there is much headway to be made by those who invest early.

Clifford Chance partner Claude Brown, one of those on the ground in Nairobi, says: “We’re already seeing an increase in the number of law firms who are becoming active in this sector. Things such as shifts in government policy and this UN conference make it a safer environment for firms to commit.”

Clifford Chance, with its environmental and climatic trading group, has some 10 partners and 40 lawyers worldwide involved, with “about half” said to be dedicated to the practice full time, according to Brown. The firm has expertise in its London, Moscow, Beijing and Tokyo offices, with support in Washington DC and New York.

Herbert Smith played a role in recent changes to international law, allowing CO2 gas to be stored in depleted oil or gas reservoirs under the world’s oceans and allowing projects such as proposed ‘clean coal power’ stations to proceed (see facing page). The project exposes the breadth of issues firms could be involved with.

Partner Mark Newbery says: “It’s such a complex value chain. From coal supply and transportation to the technology to extract the CO2 and the hydrogen, to the transportation, storage and injection of CO2 underground and the security of doing so.

“Carbon capture and storage was not a recognised technology under the EU emissions trading scheme. That needs to change, and it needs to change for a lot of developing technologies.”

Another avenue from which firms are finding work is through corporate advice for IPOs on AIM. A number of emissions trading companies are listing on AIM, such as Camco International, which raised £24.9m for a market capitalisation of £83m when it listed in April. Advised by Hunton’s AIM team, the energy team now handles the carbon trader’s Emissions Reduction Purchase Agreements.

When the Stern Review came out and said there was an economy for carbon credits to trade at $85 (£45) a tonne (they currently trade between $8 (£4.24) a tonne and $15 (£7.95) a tonne), the share prices of similar companies shot up. Investment equals opportunity equals mandates.

Established power-generating companies are also involved in the market. International Power, for instance, groups its carbon trading together with its gas and electricity trading business. Constellation Energy has its own commodities group, which trades UK power and gas as well as international carbon. Both companies have dedicated in-house lawyers that sit and work with the companies’ traders.

The clients are already active, and becoming increasingly so. With the revelation of an environmentally focused investment bank, and funds being established by the big players such as Morgan Stanley, Goldman Sachs and HSBC, the mandates are going to continue to be there to win.

The race is on – not just to save the planet, but to grab a healthy slice of the fat profit pie on offer.