The Indian futures markets has had a reasonable 'success story' however this success has been restricted to only precious metals,some base metals and crude oil contracts which has been due to significant retail and investor participation.
However it is to be noted that Agricultural futures has not succeeded and as a matter of fact the recent drop in volumes on major agricultural futures exchange in India has got many a stake holders worried.
Although it is very easy for us to say that it was the fault of policy makers and recent bans etc however that is not the real truth.
We at Altos Research believe that the real reason for failure of agro contracts in the India context is the absence of an offset method which is extremely popular in many global exchanges namely the EFP or the Exchange for Physicals(not to be confused with the SPOT exchange, and an electronic spot exchange is not the panacea of all ills of the commodity market).
What is an EFP ?
There are four ways to close out a futures contract:
1] Offset is the transaction of a reversing trade on the exchange. If you are short 20 March soybean futures traded on the Chicago Board of Trade, you can close the position by taking an offsetting long position in 20 March soybean contracts on the same exchange. There will be a final margining at the end of the day, and then the position will be closed.
2] Cash settlement is simply the holding of a cash settled future until expiration. At that time, there is a final margin payment, and the contract expires.
3] Delivery is the holding of a physically settled future until it physically settles according to exchange rules.
4] Exchange for physicals (EFP) is a form of privately negotiated physical settlement of long and short futures positions held by two parties.This aspect has been completely ignored in the Indian context and this is what we believe is required for the success of Agricultural Contracts in the Indian derivatives exchanges.
Every futures contract has a last trade date and a delivery period specified by the exchange. In the case of a cash settled future, the delivery period is the last trade date. On that date, the settlement price is set equal to the cash price of the underlier. There is a final margining based on that settlement price, and then the contract expires.
For physically settled futures, exchange rules depend upon the specific underlier. Usually, there is an entire month—called the delivery month—during which delivery may occur. The last trading day for the future falls towards the end of that month. A party that is short a future may elect to deliver the underlier on any business day in the delivery month. Typically, notice of delivery must be made to the exchange say two-five business days prior to delivery. The date on which notice is given is called the notice date. The first possible date for notice comes towards the end of the month preceding the delivery month. It is called the first notice date. Upon receiving notice of delivery, the exchange selects a party that is long the future to take the delivery. This may be the party with the largest long position in the future. Alternatively, the party to take delivery may be selected by lot.
The vast majority of futures contracts are traded by hedgers or speculators with no interest in taking or delivering the underlier. Such parties holding long futures will offset them prior to the first notice date. Those with short positions will offset them by the last trade date. Most futures are closed out by offset.
Exchanges specify conditions of delivery. These include acceptable locations for delivery, in the case of commodities or energies. It includes specifics about the quality, grade or nature of the underlier to be delivered. For example, only certain Treasury bonds may be delivered under the Chicago Board of Trade's Treasury bond future. Only certain growths of coffee may be delivered under the Coffee, Sugar and Cocoa Exchange's coffee future.
In many agricultral commodity or energy markets, parties want to settle futures by delivery, but exchange rules are too restrictive for their needs. For example, the New York Mercantile Exchange requires that natural gas be delivered at the Henry Hub in Louisiana. Suppose two parties need to buy/sell gas at some other hub and have transacted futures to hedge against price movements prior to the transaction.
What should they do?
One answer is that they could privately negotiate the trade(OTC) and then reverse their futures positions by offset. This requires that they take price risk during the period between closing the physical trade and offsetting their respective futures positions. Many exchanges offer an alternative called exchange for physicals (EFP).
The mechanics of EFP vary by exchange. Generally, the parties privately negotiate their physical trade. Then, instead of offsetting their futures hedges with trades on the exchange, they inform the exchange that they want to transfer the futures from one party to the other, closing out their respective positions.
Essentially, EFP is customizable physical delivery.
An Exchange of Futures for Physical (EFP) is a transaction negotiated off-market in which one party buys physical assets and sells futures contracts while the opposite party sells the physical market products and buys futures contracts.
EFPs provide a mechanism to:
1]swap from a futures to a physical position or vice versa
2] off market price certainty for large physical vs futures transactions
3] fulfilll delivery commitments
The physical and futures components must be 'substantially similar' and equal in terms of either:
--> value (ie the value of the physical being similar to the value of the futures); or by
--> quantity (the quantity of the physical being similar to the quantity of the futures)
An Example of an EFP contract is the one on the Australian Futures exchange at Sydeny.
Commodity contracts (wool, electricity) can provide a hedge either for the quantity or amount (value) of a physical transaction.
If a trader is holding 20 tonnes (20,000 kilograms) of greasy wool and wished to exchange it for SFE Greasy Wool Futures contracts, the exchange could be made either:
1)at any reasonable price for 8 contracts (each of 2,500 kilograms), or
2) for an equivalent value of futures. If the physical is trading at 600 cents/kilogram and the futures contract is priced at 670, the hedge could be made against the ($6.00 x 20,000 =) $120,000 worth of wool by using ($120,000/($6.70 x 2,500 kg) = approx.) 7 futures contracts.
Either trade would be deemed by SFE to be a valid EFP.
Note that the physical wool should have a micron measurement within that allowed for in the futures. For example SFE Fine Wool Futures includes 19.6 – 22.5 microns and therefore the physical component of an EFP involving SFE Fine Wool Futures should include a physical of a similar size. If the wool traded is in a greasy state, the yield of the physical wool should also be submitted.
For commodities with variable quality, some allowance can be made for variation from SFE contract-specified quality, but this must be justified to SFE on enquiry.(EFB Exchange for Basis)
My 2 cents on this and Sincerely hope that Agro contracts suceed in our country because honestly that is going to determine the future of futures in our country for time to come.
(Note: This is an abstract of Research on "Success formula for Agricultural Futures in India" You can order the complete copy of this research paper from http://www.research.altostrade.com)
also check out for our daily research http://altosdailyresearch.blogspot.com
Wednesday, October 31, 2007
Thursday, August 23, 2007
The World of Non-conventional commodities ?
The World of Non-conventional commodities ?
Having been in the business of commodity trading ever since I passed out of engineering in the year 1996 has made me look at this business through different cycles and also through different perspectives.
The world of Non conventional commodities,i.e commodities that are truly not commodities but people at large are considering them to be commodities.
Nature's commodity outputs
Commodity thinking is undergoing a more direct revival thanks to the theorists of "natural capital" Natural capital, as described in the book Natural Capitalism, is a metaphor for the mineral, plant, and animal formations of the Earth's biosphere when viewed as a means of production of oxygen, water filter, erosion preventer, or provider of other ecosystem services. It is one approach to ecosystem valuation, an alternative to the traditional view of all non-human life as passive natural resources, and to the idea of ecological health. However, human knowledge and understanding of the natural environment is never complete, and therefore the boundaries of natural capital expand or contract as knowledge is gained or lost Natural Cpital whose products, some economists argue, are the only genuine commodities - air, water, and calories we consume being mostly interchangeable when they are free of pollution or disease. Whether we wish to think of these things as tradeable commodities rather than birthrights has been a major source of controversy in many nations.
Most types of environmental economics consider the shift to measuring them inevitable, arguing that reframing political economy to consider the flow of these basic commodities first and foremost, helps avoids use of any military fiat except to protect "natural capital" itself, and basing credit-worthiness more strictly on commitment to preserving biodiversity aligns the long-term interests of ecoregions, societies, and individuals. They seek relatively conservative sustainable development schemes that would be amenable to measuring well-being over long periods of time, typically "seven generations", in line with Native American as well as the Hindu 'Saptha kula' thought.
Weather trading
However, this is not the only way in which commodity thinking interacts with ecologists' thinking. Hedging began as a way to escape the consequences of damage done by natural conditions. It has matured not only into a system of interlocking guarantees, but also into a system of indirectly trading on the actual damage done by weather, using "weather derivatives". For a price, this relieves the purchaser of the following types of concerns:
"Will a freeze hurt the Brazilian coffee crop? Will there be a drought in the U.S. Corn Belt? What are the chances that we will have a cold winter, driving natural gas prices higher and creating havoc in Florida orange areas? What is the status of El Niño? How is Hurricane Dean going to affect Crude oilt prices ?"
Emissions trading
Weather trading is just one example of "negative commodities", units of which represent harm rather than good.
"Economy is three fifths of ecology" argues Mike Nickerson, one of many economic theorists who holds that nature's productive services and waste disposal services are poorly accounted for. One way to fairly allocate the waste disposal capacity of nature is "cap and trade" market structure that is used to trade toxic emissions rights in the United States, e.g. SO2. This is in effect a "negative commodity", a right to throw something away.
In this market, the atmosphere's capacity to absorb certain amounts of pollutants is measured, divided into units, and traded amongst various market players. Those who emit more SO2 must pay those who emit less. Critics of such schemes argue that unauthorized or unregulated emissions still happen, and that "grandfathering" schemes often permit major polluters, such as the state governments' own agencies, or poorer countries, to expand emissions and take jobs, while the SO2 output still floats over the border and causes death.
In practice, political pressure has overcome most such concerns and it is questionable whether this is a capacity that depends on U.S. clout: The Kyoto Protocol established a similar market in global greenhouse gas emissions without U.S. support.
The Community we live as commodity?
This highlights one of the major issues with global commodity markets of either the positive or negative kind. A community must somehow believe that the commodity instrument is real, enforceable, and well worth paying for.
A very substantial part of the anti-globalization movement opposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current global credit money regime anchored by the Bank for International Settlements, does not in their view correspond to measurable benefits to human well-being worldwide. They seek a fairer way for societies to compete in the global markets that will not require conversion of natural capital to natural resources, nor human capital to move to developed nations in order to find work.
Some economic systems by green economists would replace the "gold standard" with a "biodiversity standard". It remains to be seen if such plans have any merit other than as political ways to draw attention to the way capitalism itself interacts with life.
Is human life a commodity? Cloning et all
While classical, neoclassical, and Marxist approaches to economics tend to treat labor differently, they are united in treating nature as a resource.
The green economists and the more conservative environmental economics argue that not only natural ecologies, but also the life of the individual human being is treated as a commodity by the global markets. A good example is the IPCC calculations cited by the Global Commons Institute as placing a value on a human life in the developed world "15x higher" than in the developing world, based solely on the ability to pay to prevent climate change.
Is free time a commodity? Time is money right ?
Accepting this result, some argue that to put a price on both is the most reasonable way to proceed to optimize and increase that value relative to other goods or services. This has led to efforts in measuring well-being, to assign a commercial "value of life", and to the theory of Natural Capitalism - fusions of green and neoclassical approaches - which focus predictably on energy and material efficiency, i.e. using far less of any given commodity input to achieve the same service outputs as a result.
Indian economist Amartya Sen, applying this thinking to human freedom itself, argued in his 1999 book "Development as Freedom" that human free time was the only real service, and that sustainable development was best defined as freeing human time. Sen won The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1999 and based his book on invited lectures he gave at the World Bank
Having been in the business of commodity trading ever since I passed out of engineering in the year 1996 has made me look at this business through different cycles and also through different perspectives.
The world of Non conventional commodities,i.e commodities that are truly not commodities but people at large are considering them to be commodities.
Nature's commodity outputs
Commodity thinking is undergoing a more direct revival thanks to the theorists of "natural capital" Natural capital, as described in the book Natural Capitalism, is a metaphor for the mineral, plant, and animal formations of the Earth's biosphere when viewed as a means of production of oxygen, water filter, erosion preventer, or provider of other ecosystem services. It is one approach to ecosystem valuation, an alternative to the traditional view of all non-human life as passive natural resources, and to the idea of ecological health. However, human knowledge and understanding of the natural environment is never complete, and therefore the boundaries of natural capital expand or contract as knowledge is gained or lost Natural Cpital whose products, some economists argue, are the only genuine commodities - air, water, and calories we consume being mostly interchangeable when they are free of pollution or disease. Whether we wish to think of these things as tradeable commodities rather than birthrights has been a major source of controversy in many nations.
Most types of environmental economics consider the shift to measuring them inevitable, arguing that reframing political economy to consider the flow of these basic commodities first and foremost, helps avoids use of any military fiat except to protect "natural capital" itself, and basing credit-worthiness more strictly on commitment to preserving biodiversity aligns the long-term interests of ecoregions, societies, and individuals. They seek relatively conservative sustainable development schemes that would be amenable to measuring well-being over long periods of time, typically "seven generations", in line with Native American as well as the Hindu 'Saptha kula' thought.
Weather trading
However, this is not the only way in which commodity thinking interacts with ecologists' thinking. Hedging began as a way to escape the consequences of damage done by natural conditions. It has matured not only into a system of interlocking guarantees, but also into a system of indirectly trading on the actual damage done by weather, using "weather derivatives". For a price, this relieves the purchaser of the following types of concerns:
"Will a freeze hurt the Brazilian coffee crop? Will there be a drought in the U.S. Corn Belt? What are the chances that we will have a cold winter, driving natural gas prices higher and creating havoc in Florida orange areas? What is the status of El Niño? How is Hurricane Dean going to affect Crude oilt prices ?"
Emissions trading
Weather trading is just one example of "negative commodities", units of which represent harm rather than good.
"Economy is three fifths of ecology" argues Mike Nickerson, one of many economic theorists who holds that nature's productive services and waste disposal services are poorly accounted for. One way to fairly allocate the waste disposal capacity of nature is "cap and trade" market structure that is used to trade toxic emissions rights in the United States, e.g. SO2. This is in effect a "negative commodity", a right to throw something away.
In this market, the atmosphere's capacity to absorb certain amounts of pollutants is measured, divided into units, and traded amongst various market players. Those who emit more SO2 must pay those who emit less. Critics of such schemes argue that unauthorized or unregulated emissions still happen, and that "grandfathering" schemes often permit major polluters, such as the state governments' own agencies, or poorer countries, to expand emissions and take jobs, while the SO2 output still floats over the border and causes death.
In practice, political pressure has overcome most such concerns and it is questionable whether this is a capacity that depends on U.S. clout: The Kyoto Protocol established a similar market in global greenhouse gas emissions without U.S. support.
The Community we live as commodity?
This highlights one of the major issues with global commodity markets of either the positive or negative kind. A community must somehow believe that the commodity instrument is real, enforceable, and well worth paying for.
A very substantial part of the anti-globalization movement opposes the commodification of currency, national sovereignty, and traditional cultures. The capacity to repay debt, as in the current global credit money regime anchored by the Bank for International Settlements, does not in their view correspond to measurable benefits to human well-being worldwide. They seek a fairer way for societies to compete in the global markets that will not require conversion of natural capital to natural resources, nor human capital to move to developed nations in order to find work.
Some economic systems by green economists would replace the "gold standard" with a "biodiversity standard". It remains to be seen if such plans have any merit other than as political ways to draw attention to the way capitalism itself interacts with life.
Is human life a commodity? Cloning et all
While classical, neoclassical, and Marxist approaches to economics tend to treat labor differently, they are united in treating nature as a resource.
The green economists and the more conservative environmental economics argue that not only natural ecologies, but also the life of the individual human being is treated as a commodity by the global markets. A good example is the IPCC calculations cited by the Global Commons Institute as placing a value on a human life in the developed world "15x higher" than in the developing world, based solely on the ability to pay to prevent climate change.
Is free time a commodity? Time is money right ?
Accepting this result, some argue that to put a price on both is the most reasonable way to proceed to optimize and increase that value relative to other goods or services. This has led to efforts in measuring well-being, to assign a commercial "value of life", and to the theory of Natural Capitalism - fusions of green and neoclassical approaches - which focus predictably on energy and material efficiency, i.e. using far less of any given commodity input to achieve the same service outputs as a result.
Indian economist Amartya Sen, applying this thinking to human freedom itself, argued in his 1999 book "Development as Freedom" that human free time was the only real service, and that sustainable development was best defined as freeing human time. Sen won The Bank of Sweden Prize in Economic Sciences in Memory of Alfred Nobel in 1999 and based his book on invited lectures he gave at the World Bank
Thursday, July 19, 2007
Commodity derivative markets newest and boldest contract
Commodity derivative markets newest and boldest contract " HEDGE STREET BINARY OPTIONS CONTRACTS" will it be the most sucessfull every ?
HedgeStreet is an Internet-based government regulated (CFTC) derivatives exchange where traders can hedge against or speculate on economic events and price movements.
HedgeStreet targets retail speculators and hedgers by offering $100 contracts. The CBOE owns a minority interest in HedgeStreet.
HedgeStreet offers a variety of contracts designed to give private individuals the ability to manage the particular risks they face.
HedgeStreet's contracts span a range of markets, from commodities and currencies to economic indicators, employment, fuel, housing prices, inflation, hurricane insurance estimates, and interest and mortgage rates. HedgeStreet members can use the site to put in order entries, find out about market depth, historical data, and position reporting.
Although the liquidity on HedgeStreet contracts is low as of this submission, as a regulated exchange that offers binary option contracts--a contract format which they pioneered--they do add value in the derivatives marketplace.
Liquidity for the exchange has recently risen due to the $10 million investment by market makers Susquehanna International Group (SIG) and DRW Trading Group in March of 2007.
Based in San Mateo, California, the company is subject to regulatory oversight by the Commodity Futures Trading Commission. Membership is only open to people residing in the United States. Member funds are held at the Union Bank of California.
What is a binary Option ?
A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. Thus, the options are binary in nature because there are only two possible outcomes. They are also called all-or-nothing options or digital options.
For example, suppose I buy a binary cash-or-nothing call option on XYZ Corp's stock struck at $100 with a binary payoff of $1000. Then if at the future maturity date, the stock is trading at or above $100, I receive $1000. If its stock is trading below $100, I receive nothing.
In the popular Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function.
HedgeStreet is an Internet-based government regulated (CFTC) derivatives exchange where traders can hedge against or speculate on economic events and price movements.
HedgeStreet targets retail speculators and hedgers by offering $100 contracts. The CBOE owns a minority interest in HedgeStreet.
HedgeStreet offers a variety of contracts designed to give private individuals the ability to manage the particular risks they face.
HedgeStreet's contracts span a range of markets, from commodities and currencies to economic indicators, employment, fuel, housing prices, inflation, hurricane insurance estimates, and interest and mortgage rates. HedgeStreet members can use the site to put in order entries, find out about market depth, historical data, and position reporting.
Although the liquidity on HedgeStreet contracts is low as of this submission, as a regulated exchange that offers binary option contracts--a contract format which they pioneered--they do add value in the derivatives marketplace.
Liquidity for the exchange has recently risen due to the $10 million investment by market makers Susquehanna International Group (SIG) and DRW Trading Group in March of 2007.
Based in San Mateo, California, the company is subject to regulatory oversight by the Commodity Futures Trading Commission. Membership is only open to people residing in the United States. Member funds are held at the Union Bank of California.
What is a binary Option ?
A binary option is a type of option where the payoff is either some fixed amount of some asset or nothing at all. The two main types of binary options are the cash-or-nothing binary option and the asset-or-nothing binary option. The cash-or-nothing binary option pays some fixed amount of cash if the option expires in-the-money while the asset-or-nothing pays the value of the underlying security. Thus, the options are binary in nature because there are only two possible outcomes. They are also called all-or-nothing options or digital options.
For example, suppose I buy a binary cash-or-nothing call option on XYZ Corp's stock struck at $100 with a binary payoff of $1000. Then if at the future maturity date, the stock is trading at or above $100, I receive $1000. If its stock is trading below $100, I receive nothing.
In the popular Black-Scholes model, the value of a digital option can be expressed in terms of the cumulative normal distribution function.
can there be a derivative exchange for Intellectual proprieatry rights ?
Derivatives Exchange for IP rights ?
Current methods of intellectual property exchange are inefficient and often hinder companies from easily realizing value from existing IP assets. In addition, intellectual property enforcement is costly and uncertain and entails lengthy negotiations or legal actions.
As a result, necessary IP rights are not effectively transferred, the “best price” for IP is rarely achieved, and the process itself inhibits the market adoption of new technology based products and hence their companies’ economic growth.
What is Intellectual capital ?
Intellectual capital is a term with various definitions in different theories of economics. Accordingly its only truly neutral definition is as a debate over economic "intangibles". Ambiguous combinations of instructional capital and individual capital employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a capital asset whose yield is intellectual rights.Such use is rare, however, and the term rarely or never appears in accounting proper - it refers to a debate, and to the assumed capital base that creates intellectual property, rather than an auditable style of capital.
Perhaps due to their industry focus, the term "intellectual capital" is employed mostly by theorists in information technology, innovation research, technology transfer and other fields concerned primarily with technology, standards, and venture capital.
It was particularly prevalent in 1995-2000 as theories proliferated to explain the "dotcom boom" and high valuations. During this period it was often observed that computer code and programmers were bearing a substantial premium when combined in new unproven companies.
It is hard to see how this differs from the tulip boom, however, when it would have been just as likely to assign a high value to the seemingly-magical combinations of tulip bulbs and, say, the pots they grew in.Brand as an AssetWhether flags, brands, labels or simple fear dominate economic decisions, it seems that the underlying theories of intellectual capital and of human capital don't explain them.
When attached to "capital" as prefixes, the terms "intellectual", "knowledge" and "human" often conceal more than their use can reveal. Thus the terms intellectual capital, knowledge capital and human capital more properly describe debates, not assets, as internally generated assets do not appear on a balance sheet, however International Financial Reporting Standard 3 on Business Combinations requires acquired intangible assets to be accounted for during the purchase price allocation exercise.
They produce neat abstractions but so far poorly explain what actually occurs in the biologically real world: individuals buying in a social setting based on instructions.So far, the more specific terms "individual", "instructional" and "social" from human development theory, have been preferred in Wikipedia as adjectives describing classes of capital. In part this is because these terms have definitions that arise from academic categories and practices rather than faddish marketing or management theories.
There are standards for assigning value to these, e.g. the UN Human Development Index which literally ranks flags (of countries) for quality of life.Extending such standards to labels (via mandatory labelling) and applying them positively in brand management, e.g. positioning a brand for appeal to an ethical minority, is increasingly common.
Projects by Consumerium and AdBusters seek to make comprehensive outcomes more important in buying decisions. This in turn is part of a trend towards more moral purchasing.When viewed as an asset, then, a brand is simple social capital that may have an increasing amount of instructional capital attached to satisfy an ever-rising demand for more information about product origin, production and distribution.
Why should any asset be intangeible ?
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort.
There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how,knowledge), collaboration activities, leverage activities, and structural activities.
Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price.
Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed.
The development of new IP exchange practices ultimately may lead to the creation of an operating Intellectual Property Rights Exchange in the future, providing for the efficient open market trading of various direct(spot/cash) and derivative IP-based license, debt equity and hybrid investments.
Such an exchange could bring together IP owners, consumers and investors with a solution for current market inefficiency and provide companies with a mechanism for funding additional innovation, reducing their exposure to legal actions, and increasing their access to underutilized patents and technologies. The objective that as a result, faster commercialization of technology will accelerate long-term economic growth.
Different types of trading activities may be developed, bound by the common principles of consistent transaction termsand market pricing. Transactions might be for license rights (e.g., for a specific quantity of production), for ownership rights (e.g., via an open auction), or for various kinds of derivative rights based on specific conditions affecting the underlying asset value.
The derivatives exchange will direct the manner in which the intellectual property rights, either owned by these companies or acquired on their behalf, will be transferred to third parties in accordance with the owners’ objectives. This will relieve the company of the burden of establishing andadministering a licensing program to maximize the value of their IP and will provide investors in IP an avenue for marketing those rights instead of engaging in inefficient, costly and unfamiliar licensing negotiations.
Where all could the applications be ?
1. Under the most recent context global sporting events like the current (2007) world cup, an exchange for derivatives comprising of notional cash value of say runs scored by a batsman, a basket of such values could be securitized and be traded on an exchange, in lay man terms an Exchange which will have an instrument SachinAPRIL 30, i.e a derivatives instrument whose pay off would be linked to the runs scored by sachin as of april 30th or AUSTRALIAWC07APRIL30 this market could then attract participants like advertisers,media channels,branders,consumers investors and speculators.
2. Film and Movie Industry : an active and liquid market comprising of actors,technicians,financiers,producers,investors,distrubutors,advertisers media channels and end consumners(the guy who pays money and buys ticket/dvds)
3. Software and Products company.
4. Architectural firms,building, construction and realt companies,REITS. Eg RELIANCESEZNEAR MUMBAI 2011 futures.
5. Art and artwork.
Current methods of intellectual property exchange are inefficient and often hinder companies from easily realizing value from existing IP assets. In addition, intellectual property enforcement is costly and uncertain and entails lengthy negotiations or legal actions.
As a result, necessary IP rights are not effectively transferred, the “best price” for IP is rarely achieved, and the process itself inhibits the market adoption of new technology based products and hence their companies’ economic growth.
What is Intellectual capital ?
Intellectual capital is a term with various definitions in different theories of economics. Accordingly its only truly neutral definition is as a debate over economic "intangibles". Ambiguous combinations of instructional capital and individual capital employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a capital asset whose yield is intellectual rights.Such use is rare, however, and the term rarely or never appears in accounting proper - it refers to a debate, and to the assumed capital base that creates intellectual property, rather than an auditable style of capital.
Perhaps due to their industry focus, the term "intellectual capital" is employed mostly by theorists in information technology, innovation research, technology transfer and other fields concerned primarily with technology, standards, and venture capital.
It was particularly prevalent in 1995-2000 as theories proliferated to explain the "dotcom boom" and high valuations. During this period it was often observed that computer code and programmers were bearing a substantial premium when combined in new unproven companies.
It is hard to see how this differs from the tulip boom, however, when it would have been just as likely to assign a high value to the seemingly-magical combinations of tulip bulbs and, say, the pots they grew in.Brand as an AssetWhether flags, brands, labels or simple fear dominate economic decisions, it seems that the underlying theories of intellectual capital and of human capital don't explain them.
When attached to "capital" as prefixes, the terms "intellectual", "knowledge" and "human" often conceal more than their use can reveal. Thus the terms intellectual capital, knowledge capital and human capital more properly describe debates, not assets, as internally generated assets do not appear on a balance sheet, however International Financial Reporting Standard 3 on Business Combinations requires acquired intangible assets to be accounted for during the purchase price allocation exercise.
They produce neat abstractions but so far poorly explain what actually occurs in the biologically real world: individuals buying in a social setting based on instructions.So far, the more specific terms "individual", "instructional" and "social" from human development theory, have been preferred in Wikipedia as adjectives describing classes of capital. In part this is because these terms have definitions that arise from academic categories and practices rather than faddish marketing or management theories.
There are standards for assigning value to these, e.g. the UN Human Development Index which literally ranks flags (of countries) for quality of life.Extending such standards to labels (via mandatory labelling) and applying them positively in brand management, e.g. positioning a brand for appeal to an ethical minority, is increasingly common.
Projects by Consumerium and AdBusters seek to make comprehensive outcomes more important in buying decisions. This in turn is part of a trend towards more moral purchasing.When viewed as an asset, then, a brand is simple social capital that may have an increasing amount of instructional capital attached to satisfy an ever-rising demand for more information about product origin, production and distribution.
Why should any asset be intangeible ?
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort.
There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how,knowledge), collaboration activities, leverage activities, and structural activities.
Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price.
Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed.
The development of new IP exchange practices ultimately may lead to the creation of an operating Intellectual Property Rights Exchange in the future, providing for the efficient open market trading of various direct(spot/cash) and derivative IP-based license, debt equity and hybrid investments.
Such an exchange could bring together IP owners, consumers and investors with a solution for current market inefficiency and provide companies with a mechanism for funding additional innovation, reducing their exposure to legal actions, and increasing their access to underutilized patents and technologies. The objective that as a result, faster commercialization of technology will accelerate long-term economic growth.
Different types of trading activities may be developed, bound by the common principles of consistent transaction termsand market pricing. Transactions might be for license rights (e.g., for a specific quantity of production), for ownership rights (e.g., via an open auction), or for various kinds of derivative rights based on specific conditions affecting the underlying asset value.
The derivatives exchange will direct the manner in which the intellectual property rights, either owned by these companies or acquired on their behalf, will be transferred to third parties in accordance with the owners’ objectives. This will relieve the company of the burden of establishing andadministering a licensing program to maximize the value of their IP and will provide investors in IP an avenue for marketing those rights instead of engaging in inefficient, costly and unfamiliar licensing negotiations.
Where all could the applications be ?
1. Under the most recent context global sporting events like the current (2007) world cup, an exchange for derivatives comprising of notional cash value of say runs scored by a batsman, a basket of such values could be securitized and be traded on an exchange, in lay man terms an Exchange which will have an instrument SachinAPRIL 30, i.e a derivatives instrument whose pay off would be linked to the runs scored by sachin as of april 30th or AUSTRALIAWC07APRIL30 this market could then attract participants like advertisers,media channels,branders,consumers investors and speculators.
2. Film and Movie Industry : an active and liquid market comprising of actors,technicians,financiers,producers,investors,distrubutors,advertisers media channels and end consumners(the guy who pays money and buys ticket/dvds)
3. Software and Products company.
4. Architectural firms,building, construction and realt companies,REITS. Eg RELIANCESEZNEAR MUMBAI 2011 futures.
5. Art and artwork.
Tuesday, July 17, 2007
Crusader of Rights to Information is no more
Transparency in Public Life15 Jul, 2007
Transparency in public life
By Prakash Kardaley
(Prakash Kardaley, a crusader for the Right to Information passed away of 15 July 2007. This article was written a three days before his demise and reflects his views on transparency)
The greatest adversary of the law on of transparency is not really the bureaucracy. Not every bureaucrat is opposed to transparency; in any case, the bureaucracy can always be tamed or disciplined. The worst opposition to the spirit of transparency is our own hypocrisy.
We want every piece of paper in government offices to be made accessible to the people and yet we fiercely resist any suggestion to open up our own income tax returns – which in fact is our declaration of our liability to the government and thereby to the people at large. There are many organizations that make ear-splitting noise to force the government to enforce every word and comma of the transparency law but are significantly silent when it comes to opening up their own transactions.
What is wrong with transparency unless one desperately wants to cover up one’s own misdeeds? Transparency in public life either in spirit or as a piece of legislation, when codified into a law knows its legitimate laxman rekha. It does not cause any unwarranted invasion of individual privacy. It does not expect disclosure of information that would be detrimental to the society at large. On the other hand, it attacks excessive secrecy, which is in fact is injurious to the well being of society. Any opposition to the spirit of transparency, therefore, must be seen as profound disrespect to society.
Many of us tend to take a myopic view of the law on transparency. We identify it as a weapon bestowed upon people to root out corruption in government. Of course, that is one of its objectives. But the purpose of creating such legislation goes much beyond. The Transparency law - rightly called `sunshine law’ in USA - is a potent instrument that ushers in good governance. It ensures that all bodies or institutions in the public domain function under the watchful eyes of stakeholders. This will curb malpractices and corruption.
Stakeholders of every public venture therefore, have an inherent right to demand transparency from those who function in public interest. Students and parents have a right to demand a reasonable level of transparency from educational institutions. Depositors, investors have a right to expect the same from financial institutions.
Justice P B Sawant, former judge of the Supreme Court, as the Chairman of the Press Council of India, presented the first draft of the RTI Act in India and is an ardent advocate bringing the private sector under the purview of the transparency law. The private sector gets its funds from shareholders and depositors money as well as from financial institutions, he says, which shows that they too use public resources to run their companies. All major scams, he points out, have been in the private sector, especially in banks and financial institutions and yet, secrecy is greater in the private sector, whereas truth comes out sooner in the public sector.
Justice Sawant says it is imperative to extend the RTI Act to the private sector lock and stock and barrel especially at a time when many public services and public sector undertakings are being privatized. He emphasizes that all institutions that carry out activities that are of public interest, must come under the purview of the RTI law.
The draft of the Right to Information Bill, 1996, as suggested by Press Council of India, therefore, defined “public authority” as:
(i) The Government and Parliament of India and the Government and Legislature of each of the States and a local or other authorities within the territory of India or under the control of the Government of India; and
(ii) A company, corporation, trust, firm, society or a cooperative society, whether owned or controlled by private individuals and institutions whose activities affect the public interest; [The expressions company, corporation, trust, firm, society and cooperative society shall have the same meaning as assigned to them in the respective Acts under which they are registered.]
The Right to Information Act, 2005, did not incorporate Justice Sawant’s radical definition of a public authority, but it came fairly close to his concept when it included bodies ``owned, controlled or substantially financed’’ by the government as well as ``non-Government organization substantially financed, directly or indirectly by funds’’ provided by the government.
These ``non-government organizations’’ do not merely mean the jholawala NGOs but all ``authorities, bodies or institution of self government established or constituted by or under the Constitution; by any other law made by Parliament; by any other law made by State Legislature or by notification issued or order made by the appropriate government’’, thus bringing under the purview of the RTI Act, therefore, companies, corporations, trusts, firms, societies or cooperative societies, as envisaged by Justice Sawant, irrespective of the nature of their ownership, except for the condition that these be either ``controlled or substantially financed’’ by the government.
Going by the letter and spirit of the Act, information commissions have begun giving their rulings on the interpretation of ``controlled’’ with respect to various types of these private bodies. The Gujarat Information Commission on May 15 decided that all co-operative societies, including cooperative banks, are bodies ``controlled’’ by the government and therefore are required to abide by the provisions of the RTI Act.
The Central Information Commission (CIC) on June 7 declared in unambiguous terms that functioning all recognized stock exchanges are under the ``deep and all pervasive close control’’ Central Government and hence are public authorities, being obliged to give information to any requisitioner under the Act.
In support of its observations that stock exchanges, undoubtedly are controlled by the government, the CIC cited, apart from pronouncements of the apex court, a whole array of provisions in the SEBI Act including its preamble which declares that it is "An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto".
Any right thinking person would have expected stock exchanges not to have opposed a requisition under the RTI Act in the first place or at least have decided to honour the decision of the Central Information Commission. After all, what is there to hide? What is there in any disclosure of information that would go against the public interest?
Yet, the National Stock Exchange (NSE) in its wisdom has approached the higher judiciary challenging the interpretation pronounced by the CIC. All one can do at the moment is to wait and watch, but at the same time wonder how the NSE that claims to be totally autonomous is being represented in the court by an additional solicitor general!
This article was ctrlc ctrlveed from suchetas website www.suchetadalal.com, and is copyrighted to her site, my sincere apologies are to sucheta who had to remind me of copy right violation my apologies mam i respect you and wanted people in my yahoogroups to know about RTI crusader
Transparency in public life
By Prakash Kardaley
(Prakash Kardaley, a crusader for the Right to Information passed away of 15 July 2007. This article was written a three days before his demise and reflects his views on transparency)
The greatest adversary of the law on of transparency is not really the bureaucracy. Not every bureaucrat is opposed to transparency; in any case, the bureaucracy can always be tamed or disciplined. The worst opposition to the spirit of transparency is our own hypocrisy.
We want every piece of paper in government offices to be made accessible to the people and yet we fiercely resist any suggestion to open up our own income tax returns – which in fact is our declaration of our liability to the government and thereby to the people at large. There are many organizations that make ear-splitting noise to force the government to enforce every word and comma of the transparency law but are significantly silent when it comes to opening up their own transactions.
What is wrong with transparency unless one desperately wants to cover up one’s own misdeeds? Transparency in public life either in spirit or as a piece of legislation, when codified into a law knows its legitimate laxman rekha. It does not cause any unwarranted invasion of individual privacy. It does not expect disclosure of information that would be detrimental to the society at large. On the other hand, it attacks excessive secrecy, which is in fact is injurious to the well being of society. Any opposition to the spirit of transparency, therefore, must be seen as profound disrespect to society.
Many of us tend to take a myopic view of the law on transparency. We identify it as a weapon bestowed upon people to root out corruption in government. Of course, that is one of its objectives. But the purpose of creating such legislation goes much beyond. The Transparency law - rightly called `sunshine law’ in USA - is a potent instrument that ushers in good governance. It ensures that all bodies or institutions in the public domain function under the watchful eyes of stakeholders. This will curb malpractices and corruption.
Stakeholders of every public venture therefore, have an inherent right to demand transparency from those who function in public interest. Students and parents have a right to demand a reasonable level of transparency from educational institutions. Depositors, investors have a right to expect the same from financial institutions.
Justice P B Sawant, former judge of the Supreme Court, as the Chairman of the Press Council of India, presented the first draft of the RTI Act in India and is an ardent advocate bringing the private sector under the purview of the transparency law. The private sector gets its funds from shareholders and depositors money as well as from financial institutions, he says, which shows that they too use public resources to run their companies. All major scams, he points out, have been in the private sector, especially in banks and financial institutions and yet, secrecy is greater in the private sector, whereas truth comes out sooner in the public sector.
Justice Sawant says it is imperative to extend the RTI Act to the private sector lock and stock and barrel especially at a time when many public services and public sector undertakings are being privatized. He emphasizes that all institutions that carry out activities that are of public interest, must come under the purview of the RTI law.
The draft of the Right to Information Bill, 1996, as suggested by Press Council of India, therefore, defined “public authority” as:
(i) The Government and Parliament of India and the Government and Legislature of each of the States and a local or other authorities within the territory of India or under the control of the Government of India; and
(ii) A company, corporation, trust, firm, society or a cooperative society, whether owned or controlled by private individuals and institutions whose activities affect the public interest; [The expressions company, corporation, trust, firm, society and cooperative society shall have the same meaning as assigned to them in the respective Acts under which they are registered.]
The Right to Information Act, 2005, did not incorporate Justice Sawant’s radical definition of a public authority, but it came fairly close to his concept when it included bodies ``owned, controlled or substantially financed’’ by the government as well as ``non-Government organization substantially financed, directly or indirectly by funds’’ provided by the government.
These ``non-government organizations’’ do not merely mean the jholawala NGOs but all ``authorities, bodies or institution of self government established or constituted by or under the Constitution; by any other law made by Parliament; by any other law made by State Legislature or by notification issued or order made by the appropriate government’’, thus bringing under the purview of the RTI Act, therefore, companies, corporations, trusts, firms, societies or cooperative societies, as envisaged by Justice Sawant, irrespective of the nature of their ownership, except for the condition that these be either ``controlled or substantially financed’’ by the government.
Going by the letter and spirit of the Act, information commissions have begun giving their rulings on the interpretation of ``controlled’’ with respect to various types of these private bodies. The Gujarat Information Commission on May 15 decided that all co-operative societies, including cooperative banks, are bodies ``controlled’’ by the government and therefore are required to abide by the provisions of the RTI Act.
The Central Information Commission (CIC) on June 7 declared in unambiguous terms that functioning all recognized stock exchanges are under the ``deep and all pervasive close control’’ Central Government and hence are public authorities, being obliged to give information to any requisitioner under the Act.
In support of its observations that stock exchanges, undoubtedly are controlled by the government, the CIC cited, apart from pronouncements of the apex court, a whole array of provisions in the SEBI Act including its preamble which declares that it is "An Act to provide for the establishment of a Board to protect the interest of investors in securities and to promote the development of, and to regulate the securities market and for matters connected therewith or incidental thereto".
Any right thinking person would have expected stock exchanges not to have opposed a requisition under the RTI Act in the first place or at least have decided to honour the decision of the Central Information Commission. After all, what is there to hide? What is there in any disclosure of information that would go against the public interest?
Yet, the National Stock Exchange (NSE) in its wisdom has approached the higher judiciary challenging the interpretation pronounced by the CIC. All one can do at the moment is to wait and watch, but at the same time wonder how the NSE that claims to be totally autonomous is being represented in the court by an additional solicitor general!
This article was ctrlc ctrlveed from suchetas website www.suchetadalal.com, and is copyrighted to her site, my sincere apologies are to sucheta who had to remind me of copy right violation my apologies mam i respect you and wanted people in my yahoogroups to know about RTI crusader
Buy Uranium ?
1. SupplyBetween the late 1980s and early this decade secondary supplies hung over the market, resulting in very low prices and inducing little to no investment in uranium exploration and output capacity. Since the late 1980s primary mine supply has not been sufficient to meet demand and so large quantities of non-recyclable secondary supplies were 'used up' in filling this gap over this period.
2. DemandThe drying up of secondary supply sources and tight uranium market has driven the massive increase in demand for future primary mine supply over the past three years, evidenced by a massive increase in long-term contracting in recent years. Current supply shortage is being exacerbated by speculators/hedge funds entering the market and holding large quantities of uranium (roughly 8-10,000tU is estimated be held of the market).Unlike other metals, the initial boom in the uranium price was not directly tied to China (actual demand from China to date is reportedly negligible), it is more of a traditional underinvestment / tight market related cyclical price boom.
3. Speculative activityHas been playing a big role in the boom in spot prices. On and off-market uranium futures began trading on NYME on 7 May (no physical delivery) - the June 2007 contract is trading at $134.9/lb and the February 2008 contract last traded at $150.0/lb.
Reasons to Buy into the Uranium Story…
2. DemandThe drying up of secondary supply sources and tight uranium market has driven the massive increase in demand for future primary mine supply over the past three years, evidenced by a massive increase in long-term contracting in recent years. Current supply shortage is being exacerbated by speculators/hedge funds entering the market and holding large quantities of uranium (roughly 8-10,000tU is estimated be held of the market).Unlike other metals, the initial boom in the uranium price was not directly tied to China (actual demand from China to date is reportedly negligible), it is more of a traditional underinvestment / tight market related cyclical price boom.
3. Speculative activityHas been playing a big role in the boom in spot prices. On and off-market uranium futures began trading on NYME on 7 May (no physical delivery) - the June 2007 contract is trading at $134.9/lb and the February 2008 contract last traded at $150.0/lb.
Reasons to Buy into the Uranium Story…
- Concerns over future supply fuelled by the delays at Cameco's massive 18mlbpa capacity Cigar Lake project, will keep reactor demand for future mine supply at very high levels in the coming year.
- Recent flooding at ERA's Ranger mine - the world's second highest producing mine – will reduce supply from the mine significantly in 2008, taking much-needed supply off a market already in deficit.
- High levels of reactor procurement of future mine supply is likely to continue to spill over to the spot market
- The Real need for clean fuels ,corelation with carbon credits Global warming.
- Uranium held by speculators/hedge funds appears to be in tight hands (at current prices).
- Producer, consumer and (strategic) government inventory building (China in particular), is likely to keep the market tight in the coming years.
- Uranium futures (no physical delivery) are giving bullish guidance as to uranium prices going forward – with the June 2007 contract trading around $135/lb and the early 2008 contracts at $150.0/lb.
Friday, June 1, 2007
Carbon trading ,Carbon credits ,Bushs initiative finally!
Carbon credits are a tradable permit scheme. They provide a way to reduce greenhouse gas emissions by giving them a monetary value. A credit gives the owner the right to emit one tonne of carbon dioxide.
International treaties such as the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. By allowing credits to be bought and sold, a business for which reducing its emissions would be expensive or prohibitive can pay another business to make the reduction for it. This minimizes the quota's impact on the business, while still reaching the quota.
Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. There are currently two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.
BackgroundIn addition to the burning of fossil fuels, major industry sources of greenhouse gas emissions are cement, steel, textile, and fertilizer manufacturers. The main gases emitted by these industries are methane, nitrous oxide, hydroflurocarbons, etc, which increase the atmosphere's ability to trap infrared energy.
The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control. It was formalized in the Kyoto Protocol, an international agreement between 169 countries. Carbon credits are certificates awarded to countries that are successful in reducing emissions of greenhouse gases.
For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions. Such a credit can be sold in the international market at the prevailing market price. There are two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.
How buying carbon credits attempts to reduce emissionsCarbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.
By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
A business would buy the carbon credits on an open market from organisations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.
As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as 'carbon credits.' The possibilities are endless hence making it an open market.
The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
Under JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost. Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Under IET, countries can trade in the international carbon credit market. Countries with surplus credits can sell them to countries with quantified emission limitation and reduction commitments under the Kyoto ProtocolIt is also important for any carbon credit (offset) to prove a concept called additionality. Additionality is a term used by Kyoto's Clean Development Mechanism to describe the fact that a carbon dioxide reduction project (carbon project) would not have occurred had it not been for concern for the mitigation of climate change. More succinctly, a project that has proven additionality is a beyond business as usual project.
It is generally agreed that voluntary carbon offset projects must also prove additionality in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). According the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD) : "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions, undermining the emissions target of the GHG program. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."
Emissions trading (or cap and trade) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.[1] The development of a carbon project that provides a reduction in Greenhouse Gas emissions is a way by which participating entities may generate tradeable carbon credits. Kyoto Protocol provides for this facet of its cap and trade program with the Clean Development Mechanism (CDM).
In such a plan, a central authority (usually a government agency) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given credits or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduces greenhouse gasses at the lowest possible cost to society.
There are currently several trading systems in place with the largest being the European Union's. The carbon market makes up the bulk of these and is growing in popularity. Many businesses have welcomed emissions trading as the best way to mitigate climate change. Enforcement of the caps is a problem, but unlike traditional regulation, emissions trading markets can be easier to enforce because the government overseeing the market does not need to regulate specific practices of each pollution source. However, monitoring (or estimating) and verifing of actual emissions is still required, which can be costly. Critics doubt whether these trading schemes can work as there may be too many credits given by the government, such as in the first phase of the European Union's scheme. Once a large surplus was discovered the price for credits bottomed out and effectively collapsed, with no noticeable reduction of emissions.
OverviewThe overall goal of an emissions trading plan is to reduce emissions of the greenhouse gases that cause climate change. The cap is usually lowered over time - aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap and trade systems, organizations which do not pollute may also buy credits. Environmental groups that purchase and retire pollution credits reduce emissions and raise the price of the remaining credits according to the law of demand. Corporations can also retire pollution credits by donating them to a nonprofit and then be eligible for a tax deduction. Allowances are accounted for in the balance sheet of the company as intangible assets, as recommended by the IAS 37 issued by IASB.
Because emissions trading uses markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. In theory, firms will choose the least-cost way to comply with the pollution regulation, creating incentives that reduce the cost of achieving a pollution reduction goal.
Cap & trade vs. baseline & creditThe textbook emissions trading program can be called a "cap & trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline & credit program [3] In a baseline and credit program a set of polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions. These credits can be purchased by polluters that are under a regulatory limit. Many of the criticisms of trading in general is targeted at baseline & credit programs rather than cap & trade type programs.
Major trading systems
United StatesPerhaps the most successful emission trading system to date is the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the USA. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are expected to be reduced by 50% from 1980 to 2010.[4]
Some experts argue that the "cap and trade" system of SO2 emissions reduction reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.
In 1997, the State of Illinois adopted a trading program for volatile organic compounds in most of the Chicago area, called the Emissions Reduction Market System.[5] Beginning in 2000, over 100 major sources of pollution in 8 Illinois counties began trading pollution credits.
In 2003, New York State proposed and attained commitments from 9 Northeast states to cap and trade carbon dioxide emissions. Also in 2003, corporations began voluntarily trading greenhouse gas emission allowances on the Chicago Climate Exchange.
In 2007, the California Legislature passed AB32, which was signed into law by Governor, Arnold Schwarzenegger. This bill is aimed at curbing Carbon emissions.
European UnionThe European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It commenced operation in January 2005 with all 25 (now 27) member states of the European Union participating in it.[6] It contains the world's only mandatory carbon trading program. The program caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU's Carbon Dioxide emissions.[7]
Whilst the first phase (2005 - 2007) has received much criticism due to oversupply of allowances and the distribution method of allowances (via grandfathering rather than auctioning), the European Commission have been tough on Member States' Plans for Phase II, dismissing many of them as being too loose again.[8] In addition, the first phase has established a strong carbon market. Compliance has also been high in 2006, increasing confidence in the scheme.
Kyoto ProtocolThe Kyoto Protocol is a 1997 international treaty that took effect in 2005 which currently bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations.
Green tagsGreen tags are a kind of reverse carbon trading scheme, available in the U.S. A renewable energy provider is issued one green tag for each 1000KWh of energy it produces. The energy is sold into the electrical grid, and the green tag can be sold on the open market as additional profit.
The carbon marketThis section deals with carbon emissions trading between nations. For carbon trading schemes for individuals, see Personal carbon trading. Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
Market trendCarbon emissions trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was itself a 41% increase relative to 2003 (78 mtCO2e)
Business reactionWith the creation of a market for trading carbon dioxide emissions within the Kyoto Protocol, the London financial markets has established itself as the centre of the carbon market: a potentially highly lucrative business; the New York and Chicago stock markets would like a share (which is unlikely as long as the current US administration rejects Kyoto).[11] The European Union Greenhouse Gas Emission Trading Scheme (EU ETS) began operations on 1 January 2005.
23 multinational corporations have come together in the G8 Climate Change Roundtable, a business group formed at the January 2005 World Economic Forum. The group includes Ford, Toyota, British Airways and BP. On 9 June 2005 the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases.
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.
EnforcementAnother critical part of the bargain is enforcement. Without effective enforcement, the licenses have no value. Two basic schemes exist:
In one, the regulators measure facilities, and fine or sanction those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on emission licenses, and greater pollution.
In another, a third party agency certified or licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the Internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing the cost of most regulation on the private sector. The transparency of this process helps act as a safeguard against corruption.
CriticismThere are critics of the schemes, mainly environmental justice NGOs and movements who see carbon trading as a proliferation of the free market into public spaces and environmental policy-making.[15] They point to failures in accounting, dubious science and destructive impacts of projects upon local peoples and environments as reasons why trading pollution rights should be avoided.[16] Instead they advocate making reductions at the source of pollution and energy policies that are justice-based and community-driven.[17] Most of the criticisms have been focused on the carbon market created through investment in Kyoto Mechanisms. Criticism of 'cap and trade' emissions trading has generally been more limited to lack of credibility in the first phase of the EU ETS.
Critics argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder. Overall reductions would need to come from a sufficient and challenging reduction of allowances available in the system. Likely this would occur over time through central regulation, though some environmental groups acted more immediately by buying credits and refusing to use or sell them. The National Allocation Plans by member governments of the European Union Emission Trading Scheme came under fire for this recently when some governments issued more carbon allowances than emissions during Phase I of the scheme. They have also been criticised for the widespread practice of grandfathering, where polluters are given carbon credits by governments, instead of being made to pay for them.[18] Nevertheless, the transfer of wealth from polluters to non-polluters provides incentives for polluting firms to change, especially if the market price for pollution credits is very high. Tight controls are necessary in order to establish a reverse commodity market like Green Tags as well. Regulatory agencies run the risk of issuing too many emission credits, diluting the effectiveness of regulation, and practically removing the cap. In this case instead of any net reduction in carbon dioxide emissions, beneficiaries of emissions trading simply do more of the polluting activity.
Many environmental activists and foundations consider Al Gore's strong advocation of carbon trading to be a denial of the imminence of climate change and a formalized failure of international policy to address the gravity of the carbon increase. Critics of carbon trading, such as Carbon Trade Watch argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change.[19]
A mistake may also be made by giving away emission credits rather than auctioning them. Emission credits are, in effect, money and therefore should be treated as such. The giving away of emission credits may also have the negative result of turning down investment dollars that might have been spent on sustainable technologies, if the government chooses to.
The authoritative British Newspaper the Financial Times argued on April 26th 2007 that "Carbon markets create a muddle". In the opinion of the FT these markets "...leave much room for unverifiable manipulation"
International treaties such as the Kyoto Protocol set quotas on the amount of greenhouse gases countries can produce. Countries, in turn, set quotas on the emissions of businesses. Businesses that are over their quotas must buy carbon credits for their excess emissions, while businesses that are below their quotas can sell their remaining credits. By allowing credits to be bought and sold, a business for which reducing its emissions would be expensive or prohibitive can pay another business to make the reduction for it. This minimizes the quota's impact on the business, while still reaching the quota.
Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. There are currently two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.
BackgroundIn addition to the burning of fossil fuels, major industry sources of greenhouse gas emissions are cement, steel, textile, and fertilizer manufacturers. The main gases emitted by these industries are methane, nitrous oxide, hydroflurocarbons, etc, which increase the atmosphere's ability to trap infrared energy.
The concept of carbon credits came into existence as a result of increasing awareness of the need for pollution control. It was formalized in the Kyoto Protocol, an international agreement between 169 countries. Carbon credits are certificates awarded to countries that are successful in reducing emissions of greenhouse gases.
For trading purposes, one credit is considered equivalent to one tonne of CO2 emissions. Such a credit can be sold in the international market at the prevailing market price. There are two exchanges for carbon credits: the Chicago Climate Exchange and the European Climate Exchange.
How buying carbon credits attempts to reduce emissionsCarbon credits create a market for reducing greenhouse emissions by giving a monetary value to the cost of polluting the air. This means that carbon becomes a cost of business and is seen like other inputs such as raw materials or labor.
By way of example, assume a factory produces 100,000 tonnes of greenhouse emissions in a year. The government then enacts a law that limits the maximum emissions a business can have. So the factory is given a quota of say 80,000 tonnes. The factory either reduces its emissions to 80,000 tonnes or is required to purchase carbon credits to offset the excess.
A business would buy the carbon credits on an open market from organisations that have been approved as being able to sell legitimate carbon credits. One seller might be a company that will plant so many trees for every carbon credit you buy from them. So, for this factory it might pollute a tonne, but is essentially now paying another group to go out and plant trees which will, say, draw a tonne of carbon dioxide from the atmosphere.
As emission levels are predicted to keep rising over time, it is envisioned that the number of companies wanting/needing to buy more credits will increase, which will push the market price up and encourage more groups to undertake environmentally friendly activities that create for them carbon credits to sell. Another model is that companies that use below their quota can sell their excess as 'carbon credits.' The possibilities are endless hence making it an open market.
The Kyoto Protocol provides for three mechanisms that enable developed countries with quantified emission limitation and reduction commitments to acquire greenhouse gas reduction credits. These mechanisms are Joint Implementation (JI), Clean Development Mechanism (CDM) and International Emission Trading (IET).
Under JI, a developed country with relatively high costs of domestic greenhouse reduction would set up a project in another developed country that has a relatively low cost. Under CDM, a developed country can take up a greenhouse gas reduction project activity in a developing country where the cost of greenhouse gas reduction project activities is usually much lower. The developed country would be given credits for meeting its emission reduction targets, while the developing country would receive the capital and clean technology to implement the project. Under IET, countries can trade in the international carbon credit market. Countries with surplus credits can sell them to countries with quantified emission limitation and reduction commitments under the Kyoto ProtocolIt is also important for any carbon credit (offset) to prove a concept called additionality. Additionality is a term used by Kyoto's Clean Development Mechanism to describe the fact that a carbon dioxide reduction project (carbon project) would not have occurred had it not been for concern for the mitigation of climate change. More succinctly, a project that has proven additionality is a beyond business as usual project.
It is generally agreed that voluntary carbon offset projects must also prove additionality in order to ensure the legitimacy of the environmental stewardship claims resulting from the retirement of the carbon credit (offset). According the World Resources Institute/World Business Council for Sustainable Development (WRI/WBCSD) : "GHG emission trading programs operate by capping the emissions of a fixed number of individual facilities or sources. Under these programs, tradable 'offset credits' are issued for project-based GHG reductions that occur at sources not covered by the program. Each offset credit allows facilities whose emissions are capped to emit more, in direct proportion to the GHG reductions represented by the credit. The idea is to achieve a zero net increase in GHG emissions, because each tonne of increased emissions is 'offset' by project-based GHG reductions. The difficulty is that many projects that reduce GHG emissions (relative to historical levels) would happen regardless of the existence of a GHG program and without any concern for climate change mitigation. If a project 'would have happened anyway,' then issuing offset credits for its GHG reductions will actually allow a positive net increase in GHG emissions, undermining the emissions target of the GHG program. Additionality is thus critical to the success and integrity of GHG programs that recognize project-based GHG reductions."
Emissions trading (or cap and trade) is an administrative approach used to control pollution by providing economic incentives for achieving reductions in the emissions of pollutants.[1] The development of a carbon project that provides a reduction in Greenhouse Gas emissions is a way by which participating entities may generate tradeable carbon credits. Kyoto Protocol provides for this facet of its cap and trade program with the Clean Development Mechanism (CDM).
In such a plan, a central authority (usually a government agency) sets a limit or cap on the amount of a pollutant that can be emitted. Companies or other groups that emit the pollutant are given credits or allowances which represent the right to emit a specific amount. The total amount of credits cannot exceed the cap, limiting total emissions to that level. Companies that pollute beyond their allowances must buy credits from those who pollute less than their allowances or face heavy penalties. This transfer is referred to as a trade. In effect, the buyer is being fined for polluting, while the seller is being rewarded for having reduced emissions. Thus companies that can easily reduce emissions will do so and those for which it is harder will buy credits which reduces greenhouse gasses at the lowest possible cost to society.
There are currently several trading systems in place with the largest being the European Union's. The carbon market makes up the bulk of these and is growing in popularity. Many businesses have welcomed emissions trading as the best way to mitigate climate change. Enforcement of the caps is a problem, but unlike traditional regulation, emissions trading markets can be easier to enforce because the government overseeing the market does not need to regulate specific practices of each pollution source. However, monitoring (or estimating) and verifing of actual emissions is still required, which can be costly. Critics doubt whether these trading schemes can work as there may be too many credits given by the government, such as in the first phase of the European Union's scheme. Once a large surplus was discovered the price for credits bottomed out and effectively collapsed, with no noticeable reduction of emissions.
OverviewThe overall goal of an emissions trading plan is to reduce emissions of the greenhouse gases that cause climate change. The cap is usually lowered over time - aiming towards a national emissions reduction target. In other systems a portion of all traded credits must be retired, causing a net reduction in emissions each time a trade occurs. In many cap and trade systems, organizations which do not pollute may also buy credits. Environmental groups that purchase and retire pollution credits reduce emissions and raise the price of the remaining credits according to the law of demand. Corporations can also retire pollution credits by donating them to a nonprofit and then be eligible for a tax deduction. Allowances are accounted for in the balance sheet of the company as intangible assets, as recommended by the IAS 37 issued by IASB.
Because emissions trading uses markets to determine how to deal with the problem of pollution, it is often touted as an example of effective free market environmentalism. While the cap is usually set by a political process, individual companies are free to choose how or if they will reduce their emissions. In theory, firms will choose the least-cost way to comply with the pollution regulation, creating incentives that reduce the cost of achieving a pollution reduction goal.
Cap & trade vs. baseline & creditThe textbook emissions trading program can be called a "cap & trade" approach in which an aggregate cap on all sources is established and these sources are then allowed to trade amongst themselves to determine which sources actually emit the total pollution load. An alternative approach with important differences is a baseline & credit program [3] In a baseline and credit program a set of polluters that are not under an aggregate cap can create credits by reducing their emissions below a baseline level of emissions. These credits can be purchased by polluters that are under a regulatory limit. Many of the criticisms of trading in general is targeted at baseline & credit programs rather than cap & trade type programs.
Major trading systems
United StatesPerhaps the most successful emission trading system to date is the SO2 trading system under the framework of the Acid Rain Program of the 1990 Clean Air Act in the USA. Under the program, which is essentially a cap-and-trade emissions trading system, SO2 emissions are expected to be reduced by 50% from 1980 to 2010.[4]
Some experts argue that the "cap and trade" system of SO2 emissions reduction reduced the cost of controlling acid rain by as much as 80% versus source-by-source reduction.
In 1997, the State of Illinois adopted a trading program for volatile organic compounds in most of the Chicago area, called the Emissions Reduction Market System.[5] Beginning in 2000, over 100 major sources of pollution in 8 Illinois counties began trading pollution credits.
In 2003, New York State proposed and attained commitments from 9 Northeast states to cap and trade carbon dioxide emissions. Also in 2003, corporations began voluntarily trading greenhouse gas emission allowances on the Chicago Climate Exchange.
In 2007, the California Legislature passed AB32, which was signed into law by Governor, Arnold Schwarzenegger. This bill is aimed at curbing Carbon emissions.
European UnionThe European Union Emission Trading Scheme (or EU ETS) is the largest multi-national, greenhouse gas emissions trading scheme in the world and was created in conjunction with the Kyoto Protocol. It commenced operation in January 2005 with all 25 (now 27) member states of the European Union participating in it.[6] It contains the world's only mandatory carbon trading program. The program caps the amount of carbon dioxide that can be emitted from large installations, such as power plants and carbon intensive factories and covers almost half of the EU's Carbon Dioxide emissions.[7]
Whilst the first phase (2005 - 2007) has received much criticism due to oversupply of allowances and the distribution method of allowances (via grandfathering rather than auctioning), the European Commission have been tough on Member States' Plans for Phase II, dismissing many of them as being too loose again.[8] In addition, the first phase has established a strong carbon market. Compliance has also been high in 2006, increasing confidence in the scheme.
Kyoto ProtocolThe Kyoto Protocol is a 1997 international treaty that took effect in 2005 which currently bind ratifying nations to a similar system, with the UNFCCC setting caps for each nation. Under the treaty, nations that emit less than their quota of greenhouse gases will be able to sell emissions credits to polluting nations.
Green tagsGreen tags are a kind of reverse carbon trading scheme, available in the U.S. A renewable energy provider is issued one green tag for each 1000KWh of energy it produces. The energy is sold into the electrical grid, and the green tag can be sold on the open market as additional profit.
The carbon marketThis section deals with carbon emissions trading between nations. For carbon trading schemes for individuals, see Personal carbon trading. Carbon emissions trading is emissions trading specifically for carbon dioxide (calculated in tonnes of carbon dioxide equivalent or tCO2e) and currently makes up the bulk of emissions trading. It is one of the ways countries can meet their obligations under the Kyoto Protocol to reduce carbon emissions and thereby mitigate global warming.
Market trendCarbon emissions trading has been steadily increasing in recent years. According to the World Bank's Carbon Finance Unit, 374 million metric tonnes of carbon dioxide equivalent (tCO2e) were exchanged through projects in 2005, a 240% increase relative to 2004 (110 mtCO2e) which was itself a 41% increase relative to 2003 (78 mtCO2e)
Business reactionWith the creation of a market for trading carbon dioxide emissions within the Kyoto Protocol, the London financial markets has established itself as the centre of the carbon market: a potentially highly lucrative business; the New York and Chicago stock markets would like a share (which is unlikely as long as the current US administration rejects Kyoto).[11] The European Union Greenhouse Gas Emission Trading Scheme (EU ETS) began operations on 1 January 2005.
23 multinational corporations have come together in the G8 Climate Change Roundtable, a business group formed at the January 2005 World Economic Forum. The group includes Ford, Toyota, British Airways and BP. On 9 June 2005 the Group published a statement stating that there was a need to act on climate change and stressing the importance of market-based solutions. It called on governments to establish "clear, transparent, and consistent price signals" through "creation of a long-term policy framework" that would include all major producers of greenhouse gases.
Business in the UK have come out strongly in support of emissions trading as a key tool to mitigate climate change, supported by Green NGOs.
EnforcementAnother critical part of the bargain is enforcement. Without effective enforcement, the licenses have no value. Two basic schemes exist:
In one, the regulators measure facilities, and fine or sanction those that lack the licenses for their emissions. This scheme is quite expensive to enforce, and the burden falls on the agency, which then may need to collect special taxes. Another risk is that facilities may find it far less expensive to corrupt the inspectors than purchase emissions licenses. The net effect of a poorly financed or corrupt regulatory agency is a discount on emission licenses, and greater pollution.
In another, a third party agency certified or licensed by the government, verifies that polluting facilities have licenses equal or greater than their emissions. Inspection of the certificates is performed in some automated fashion by the regulators, perhaps over the Internet, or as part of tax collection. The regulators then audit licensed facilities chosen at random to verify that certifying agencies are acting correctly. This scheme is far less expensive, placing the cost of most regulation on the private sector. The transparency of this process helps act as a safeguard against corruption.
CriticismThere are critics of the schemes, mainly environmental justice NGOs and movements who see carbon trading as a proliferation of the free market into public spaces and environmental policy-making.[15] They point to failures in accounting, dubious science and destructive impacts of projects upon local peoples and environments as reasons why trading pollution rights should be avoided.[16] Instead they advocate making reductions at the source of pollution and energy policies that are justice-based and community-driven.[17] Most of the criticisms have been focused on the carbon market created through investment in Kyoto Mechanisms. Criticism of 'cap and trade' emissions trading has generally been more limited to lack of credibility in the first phase of the EU ETS.
Critics argue that emissions trading does little to solve pollution problems overall, as groups that do not pollute sell their conservation to the highest bidder. Overall reductions would need to come from a sufficient and challenging reduction of allowances available in the system. Likely this would occur over time through central regulation, though some environmental groups acted more immediately by buying credits and refusing to use or sell them. The National Allocation Plans by member governments of the European Union Emission Trading Scheme came under fire for this recently when some governments issued more carbon allowances than emissions during Phase I of the scheme. They have also been criticised for the widespread practice of grandfathering, where polluters are given carbon credits by governments, instead of being made to pay for them.[18] Nevertheless, the transfer of wealth from polluters to non-polluters provides incentives for polluting firms to change, especially if the market price for pollution credits is very high. Tight controls are necessary in order to establish a reverse commodity market like Green Tags as well. Regulatory agencies run the risk of issuing too many emission credits, diluting the effectiveness of regulation, and practically removing the cap. In this case instead of any net reduction in carbon dioxide emissions, beneficiaries of emissions trading simply do more of the polluting activity.
Many environmental activists and foundations consider Al Gore's strong advocation of carbon trading to be a denial of the imminence of climate change and a formalized failure of international policy to address the gravity of the carbon increase. Critics of carbon trading, such as Carbon Trade Watch argue that it places disproportionate emphasis on individual lifestyles and carbon footprints, distracting attention from the wider, systemic changes and collective political action that needs to be taken to tackle climate change.[19]
A mistake may also be made by giving away emission credits rather than auctioning them. Emission credits are, in effect, money and therefore should be treated as such. The giving away of emission credits may also have the negative result of turning down investment dollars that might have been spent on sustainable technologies, if the government chooses to.
The authoritative British Newspaper the Financial Times argued on April 26th 2007 that "Carbon markets create a muddle". In the opinion of the FT these markets "...leave much room for unverifiable manipulation"
Sunday, May 27, 2007
Navin's 30 seconds with Warren buffet
Navin was my class mate in school and my good friend of last 24 years,
here was his 30 seconds with warren buffet and the day long with BH shareholders,his advise to me only "fake people do a put on with costly suits",it shows their insecurity and the camflouge value, urchins... will be urchins .... but its true class and honesty that stands apart.
Here are the details
----------------------------------
I had one of the most amazing and exhilarating experiences of my life in Omaha, Nebraska, USA. I attended the Berkshire Hathaway (BH) Annual shareholders meeting. Warren Buffet (WB) hosts a day long open house session with 27,000 people at the Qwest downtown center. This had the feeling of a U2 concert or Nelson Mandela addressing a rally in Pretoria!
WB has a cult following with people from all over the world attending this ‘Mecca of finance’ event to listen to the sage of Omaha impart his wisdom. Amongst others, I got to see Bill Gates (who sits on the board of BH) and the legendary and the outspoken billionaire Charlie Monger (CM) (WBs long time best friend, vice chairman of BH and considered the right hand/brains behind many of WBs investments).
Omaha is a simple, laid back friendly town, one would never imagine this would be home to the second richest person in the world! WB, the oracle of Omaha, is a simple, down to earth guy. He has no personal body guard and happily mingles amongst people. I drove past his house on a Sunday. It is a simple and beautiful house which he had bought some 35 years ago and is the smallest house in his neighborhood. He has no gates or physical security outside his house and an old Cadillac is parked outside his front porch. He is often seeing mowing the lawns on his own! He is revered in Omaha and the local people admire his value system. He is often seen in the local restaurants, or takes the local taxi and is often seeing walking down the road like any regular guy! BH offices in Omaha (The Kiewit center) is a simple 10 storey building, not one of these fancy buildings that you would see on Wall Street. My personal takeaway on observing all this - never try to be ’flash’ or a fake fool – just be yourself and know your strengths and weaknesses.
I will first give you a recap of my 30 seconds with WB and then give you a summary of Q&A from the day.
WB and Charlie Monger meet all the International shareholders end of the day (on Saturday) for about 2 hours. I had a dollar bill which (CM) first signed and then I moved onto WB to get his signature. I actually wish I had an Indian rupee at hand!
Navin: Mr. Buffet, I am Navin from Chennai, India
WB: Hello
Navin: Can I shake your hand
WB: Sure (shakes my hand and then starts to sign the dollar note)
Navin: Mr. Buffet, have you visited India?
WB: No, but Ajit is my most valuable person (Ajit Jain runs BH’s insurance business) but Ajit is from New Delhi
Navin: Mr. Buffet, you must come and visit us
WB: Sure, find me a deal!
Navin: smiles, as the next person replaces him
Those of you visiting Chennai can see the dollar note with WB and CMs signature neatly framed on my wall!
Other interesting snippets from the weekend.
Those attending the weekend get to check out private jets (as they are part of Net Jets) owned by BH. During the day weekend you get 25% off any BH products (there are too many companies and products for me to list them here). There is a big bbq on Sunday where you get to shop at Borsheims (jewellery and watches 25% off) and you get to enjoy a picnic in the tent. WB visits and hangs out with the crowd. Apparently, the sales from this weekend are close to 100 million dollars.
You get to buy amazing books, and if lucky signed by WB and CM. I managed to picked up some good books – ‘Biography of Einstein’, ‘How the Scots invented the Modern World’, ‘The Dhandho Investor’, ‘Seeking Wisdom’, ‘The Essays of Warren Buffet: Lessons for Corporate America’ …etc.
For an investor what is my single key takeaway?
Buy very few stocks, know them well and invest in large sums for very long term.
Not very complicated right?! That is the essence of WB!
Q&A from the day: I have taken out any technical terms/questions/comments out of all my notes for ease of reading to all. I have bolded questions to my favorite answers
Q: View on Private Equity money vs. BH
BH is buying companies for the very long term, basic math needs to make sense. Private Equity managers are compelled to invest as they make their management fee and need to start a new fund once an existing fund has completed investing. Private equity money is not necessarily a bubble though as the lock up period is long and their companies are not valued everyday. If yields on junk bonds become higher that will slow down private equity.
Q: Why less participation by BH in overseas investments?
No bias against International. Just been a lot easier to get to know companies that have been closer to us. Also there are some ownership thresholds that make it harder, e.g. in some parts of Europe, when you own 3%, you have to report. So harder to take bigger stakes without disturbing price.
Q: View on executive compensation
Executives are overpaid! Envy is a big problem i.e. they are happy if they are making x$ but the minute they hear that the next person is making more money, they get envious and want more money. Envy is the worst of the seven deadly sins. No upside to envy. Not good!! Envy is silly. CEOs appoint their director of compensation that are generally cocker spaniels not Dobermans i.e. they are going to recommend higher compensation while wagging their tail.
Q: View on Executive power?
Too much power not good. Infact too much power is counter productive. All things can be over abused. E.g. fall of Roman Empire!
Q: Effect of credit contraction on BH?
BH benefits. But no real credit crunch, that’s why Fed established. Quoting Mark Twain ‘History Doesn’t Repeat itself but Rhymes’
Q: View on Corporate profits going up?
Historically corporate profits have been 4 to 6% of GDP. Now going higher, that means someone else’s share is coming down.
Q: View on naked shorting?
No problem with it but shorts generally have a tougher time!
Q: View on gambling companies?
People like to gamble; it is essentially a tax on people’s ignorance. It is socially revolting that a Government preys on people’s weakness. It is a dirty business and not for BH!
Q: How does one become a better investor?
Read every book! Reading is good. Will fill you with competing thoughts! Then jump into water if you like it and it turns you on!
Q: What are your criteria/standards for owning a business?
It has to be a business that we understand. Reasonable valuation.
Q: View on healthcare
Too complex, We don’t try tough things. We do very little in healthcare insurance.
Q: View on private equity investors in companies vs. BH
Private Equity companies are too short term oriented. From us, you hear only once a year.
Q: Best way to value company?
Not easy. There are multiple techniques. You need a lot of experience. Can’t become a good investor rapidly. Competitive position, dynamics of industry impt. We’ve never had any system. Just do basic math.e.g if you are buying farming land in Nebraska, just do the math on what the total costs are to do farming and if the returns from that add up and justifies your purchase of the land go for it, otherwise don’t! Not too fancy or complicated.
Q: What is BH looking for to replace WB?
1 or a group of people. People that can see risks haven’t occurred. Many smart people have gone broke. Similar to 1969 when he identified 3 very smart people except that WB is at a different age cohort now and has to understand the current generation.
Q: View on Global warming?
It is a problem! Has to be taken seriously. Don’t know enough.
Q: China vs. Japan?
Great question. Don’t understand.
Q: View on silver?
Bought too early, sold too early otherwise perfect trade!
Q: Regarding returns?
Easier to earn large returns on smaller sums of money. Hard to earn on larger sums. Big ocean liner had disadvantages.
Q: Good management vs. Good Business?
Good business more important first!
Q: Expectations for equities?
Not very high expectations but expectations greater that yields on bonds.
Q: View on NYSE/Euronext merger?
Don’t understand.
Q: How do you trust somebody?
Body language important, need luck. We’ve had over 90% luck. When something is too good, be wary!
Q: Will you look at Hedge fund managers for BH?
Unlikely, people come from a certain bent of fee structure that is different from BHs view of thinking. Unsure about quality of people as long term investors.
Q: How do you handle issues of hurdle rates/discount rates?
It is very fuzzy. So much nonsense is printed. Most presentations do what listeners desire i.e they are bullshit. They are meant to please the boards of companies. Someone says 20% return, why? Because people won’t choose you otherwise. Pension funds are gullible and believe this nonsense.
Q: View on Railroad industry?
Not that exciting but competitive position has moved up.
Q: What is the best way for a 10 year old to earn money?
Deliver papers. WB tired 20 different jobs. Higher the chances of success in business the earlier you have had experience in your life. Be reliable, hard to fail!
Q: $ decline?
Expects to decline
Q: Interactions with board of directors (BOD)?
Historically BOD were potted plants. Many companies don’t really want board to interfere. Main job of BOD is appoint the right CEO, to make sure that the CEO doesn’t over leach! BOD needs to bring independent judgements to the CEO. Big deals in America are often contrary to shareholders. Nowadays bankers and lawyers have so much momentum that they determine the fate of companies and deals. BOD should own stock on their own and it should be an owners board!
Q: View on partners?
Don’t like to do deals with partners. Like to do investments on own.
Q: L/T view on commodities?
No view, invest in it coz it offers a lot of value at certain moments. Like business that have low capex. E.g. Sees Candy.
Q: Newspaper business?
Gotten a lot tougher! Imagine if there was cable and internet only and no newspapers and someone were to start a newspaper business from scratch, most people would not be up for it as it would be too complicated and simply not worth it.
Q: There was a question about BHs investment in Petrochina due to their links in Sudan and (indirect?) links to Genocide?
It was a very passionate topic. I got two takeaways from the 30 minutes this topic was discussed. ‘’Elie Wiesel (Nobel Laureate): We must take sides otherwise it helps the oppressor’’; Martin Luther King ‘’We will not be silent’’
(C) Navin Ram
www.originwave.com
Navin Ram is an entreprenuer and the Founder CEO of Origin Wave ,He was a successful investment banker with Gold Man Sachs before the entreprenurial bug bit him
here was his 30 seconds with warren buffet and the day long with BH shareholders,his advise to me only "fake people do a put on with costly suits",it shows their insecurity and the camflouge value, urchins... will be urchins .... but its true class and honesty that stands apart.
Here are the details
----------------------------------
I had one of the most amazing and exhilarating experiences of my life in Omaha, Nebraska, USA. I attended the Berkshire Hathaway (BH) Annual shareholders meeting. Warren Buffet (WB) hosts a day long open house session with 27,000 people at the Qwest downtown center. This had the feeling of a U2 concert or Nelson Mandela addressing a rally in Pretoria!
WB has a cult following with people from all over the world attending this ‘Mecca of finance’ event to listen to the sage of Omaha impart his wisdom. Amongst others, I got to see Bill Gates (who sits on the board of BH) and the legendary and the outspoken billionaire Charlie Monger (CM) (WBs long time best friend, vice chairman of BH and considered the right hand/brains behind many of WBs investments).
Omaha is a simple, laid back friendly town, one would never imagine this would be home to the second richest person in the world! WB, the oracle of Omaha, is a simple, down to earth guy. He has no personal body guard and happily mingles amongst people. I drove past his house on a Sunday. It is a simple and beautiful house which he had bought some 35 years ago and is the smallest house in his neighborhood. He has no gates or physical security outside his house and an old Cadillac is parked outside his front porch. He is often seeing mowing the lawns on his own! He is revered in Omaha and the local people admire his value system. He is often seen in the local restaurants, or takes the local taxi and is often seeing walking down the road like any regular guy! BH offices in Omaha (The Kiewit center) is a simple 10 storey building, not one of these fancy buildings that you would see on Wall Street. My personal takeaway on observing all this - never try to be ’flash’ or a fake fool – just be yourself and know your strengths and weaknesses.
I will first give you a recap of my 30 seconds with WB and then give you a summary of Q&A from the day.
WB and Charlie Monger meet all the International shareholders end of the day (on Saturday) for about 2 hours. I had a dollar bill which (CM) first signed and then I moved onto WB to get his signature. I actually wish I had an Indian rupee at hand!
Navin: Mr. Buffet, I am Navin from Chennai, India
WB: Hello
Navin: Can I shake your hand
WB: Sure (shakes my hand and then starts to sign the dollar note)
Navin: Mr. Buffet, have you visited India?
WB: No, but Ajit is my most valuable person (Ajit Jain runs BH’s insurance business) but Ajit is from New Delhi
Navin: Mr. Buffet, you must come and visit us
WB: Sure, find me a deal!
Navin: smiles, as the next person replaces him
Those of you visiting Chennai can see the dollar note with WB and CMs signature neatly framed on my wall!
Other interesting snippets from the weekend.
Those attending the weekend get to check out private jets (as they are part of Net Jets) owned by BH. During the day weekend you get 25% off any BH products (there are too many companies and products for me to list them here). There is a big bbq on Sunday where you get to shop at Borsheims (jewellery and watches 25% off) and you get to enjoy a picnic in the tent. WB visits and hangs out with the crowd. Apparently, the sales from this weekend are close to 100 million dollars.
You get to buy amazing books, and if lucky signed by WB and CM. I managed to picked up some good books – ‘Biography of Einstein’, ‘How the Scots invented the Modern World’, ‘The Dhandho Investor’, ‘Seeking Wisdom’, ‘The Essays of Warren Buffet: Lessons for Corporate America’ …etc.
For an investor what is my single key takeaway?
Buy very few stocks, know them well and invest in large sums for very long term.
Not very complicated right?! That is the essence of WB!
Q&A from the day: I have taken out any technical terms/questions/comments out of all my notes for ease of reading to all. I have bolded questions to my favorite answers
Q: View on Private Equity money vs. BH
BH is buying companies for the very long term, basic math needs to make sense. Private Equity managers are compelled to invest as they make their management fee and need to start a new fund once an existing fund has completed investing. Private equity money is not necessarily a bubble though as the lock up period is long and their companies are not valued everyday. If yields on junk bonds become higher that will slow down private equity.
Q: Why less participation by BH in overseas investments?
No bias against International. Just been a lot easier to get to know companies that have been closer to us. Also there are some ownership thresholds that make it harder, e.g. in some parts of Europe, when you own 3%, you have to report. So harder to take bigger stakes without disturbing price.
Q: View on executive compensation
Executives are overpaid! Envy is a big problem i.e. they are happy if they are making x$ but the minute they hear that the next person is making more money, they get envious and want more money. Envy is the worst of the seven deadly sins. No upside to envy. Not good!! Envy is silly. CEOs appoint their director of compensation that are generally cocker spaniels not Dobermans i.e. they are going to recommend higher compensation while wagging their tail.
Q: View on Executive power?
Too much power not good. Infact too much power is counter productive. All things can be over abused. E.g. fall of Roman Empire!
Q: Effect of credit contraction on BH?
BH benefits. But no real credit crunch, that’s why Fed established. Quoting Mark Twain ‘History Doesn’t Repeat itself but Rhymes’
Q: View on Corporate profits going up?
Historically corporate profits have been 4 to 6% of GDP. Now going higher, that means someone else’s share is coming down.
Q: View on naked shorting?
No problem with it but shorts generally have a tougher time!
Q: View on gambling companies?
People like to gamble; it is essentially a tax on people’s ignorance. It is socially revolting that a Government preys on people’s weakness. It is a dirty business and not for BH!
Q: How does one become a better investor?
Read every book! Reading is good. Will fill you with competing thoughts! Then jump into water if you like it and it turns you on!
Q: What are your criteria/standards for owning a business?
It has to be a business that we understand. Reasonable valuation.
Q: View on healthcare
Too complex, We don’t try tough things. We do very little in healthcare insurance.
Q: View on private equity investors in companies vs. BH
Private Equity companies are too short term oriented. From us, you hear only once a year.
Q: Best way to value company?
Not easy. There are multiple techniques. You need a lot of experience. Can’t become a good investor rapidly. Competitive position, dynamics of industry impt. We’ve never had any system. Just do basic math.e.g if you are buying farming land in Nebraska, just do the math on what the total costs are to do farming and if the returns from that add up and justifies your purchase of the land go for it, otherwise don’t! Not too fancy or complicated.
Q: What is BH looking for to replace WB?
1 or a group of people. People that can see risks haven’t occurred. Many smart people have gone broke. Similar to 1969 when he identified 3 very smart people except that WB is at a different age cohort now and has to understand the current generation.
Q: View on Global warming?
It is a problem! Has to be taken seriously. Don’t know enough.
Q: China vs. Japan?
Great question. Don’t understand.
Q: View on silver?
Bought too early, sold too early otherwise perfect trade!
Q: Regarding returns?
Easier to earn large returns on smaller sums of money. Hard to earn on larger sums. Big ocean liner had disadvantages.
Q: Good management vs. Good Business?
Good business more important first!
Q: Expectations for equities?
Not very high expectations but expectations greater that yields on bonds.
Q: View on NYSE/Euronext merger?
Don’t understand.
Q: How do you trust somebody?
Body language important, need luck. We’ve had over 90% luck. When something is too good, be wary!
Q: Will you look at Hedge fund managers for BH?
Unlikely, people come from a certain bent of fee structure that is different from BHs view of thinking. Unsure about quality of people as long term investors.
Q: How do you handle issues of hurdle rates/discount rates?
It is very fuzzy. So much nonsense is printed. Most presentations do what listeners desire i.e they are bullshit. They are meant to please the boards of companies. Someone says 20% return, why? Because people won’t choose you otherwise. Pension funds are gullible and believe this nonsense.
Q: View on Railroad industry?
Not that exciting but competitive position has moved up.
Q: What is the best way for a 10 year old to earn money?
Deliver papers. WB tired 20 different jobs. Higher the chances of success in business the earlier you have had experience in your life. Be reliable, hard to fail!
Q: $ decline?
Expects to decline
Q: Interactions with board of directors (BOD)?
Historically BOD were potted plants. Many companies don’t really want board to interfere. Main job of BOD is appoint the right CEO, to make sure that the CEO doesn’t over leach! BOD needs to bring independent judgements to the CEO. Big deals in America are often contrary to shareholders. Nowadays bankers and lawyers have so much momentum that they determine the fate of companies and deals. BOD should own stock on their own and it should be an owners board!
Q: View on partners?
Don’t like to do deals with partners. Like to do investments on own.
Q: L/T view on commodities?
No view, invest in it coz it offers a lot of value at certain moments. Like business that have low capex. E.g. Sees Candy.
Q: Newspaper business?
Gotten a lot tougher! Imagine if there was cable and internet only and no newspapers and someone were to start a newspaper business from scratch, most people would not be up for it as it would be too complicated and simply not worth it.
Q: There was a question about BHs investment in Petrochina due to their links in Sudan and (indirect?) links to Genocide?
It was a very passionate topic. I got two takeaways from the 30 minutes this topic was discussed. ‘’Elie Wiesel (Nobel Laureate): We must take sides otherwise it helps the oppressor’’; Martin Luther King ‘’We will not be silent’’
(C) Navin Ram
www.originwave.com
Navin Ram is an entreprenuer and the Founder CEO of Origin Wave ,He was a successful investment banker with Gold Man Sachs before the entreprenurial bug bit him
Tuesday, May 1, 2007
David Bowie Bonds & IP Securitization
Bowie Bonds are asset-backed securities of current and future revenues of the first 25 albums (287 songs) of David Bowie's collection recorded before 1990. Issued by David Bowie in 1997, they were bought for $55 million by the Prudential Insurance Company. The 287 included songs also acted as collateral to insure the bond. The Bonds were a ten-year issue, after which the royalties of the songs would return to David Bowie. By forfeiting ten years worth of royalties, Bowie was able to receive $55 million up front, which allowed him to buy out the rights to the David Bowie songs owned by a former manager. David Bowie now owns the rights to every one of his songs.The Bowie Bond issuance was perhaps the first instance of intellectual property rights securitization. The securitization of the collections of other artists, such James Brown, Ashford & Simpson and the Isley Brothers, later followed. These Bonds are named Pullman Bonds after David Pullman, the banker who pushed the original Bowie deal.Bowie Bonds offer a rich 7.9% yield; however, this is not without risk. In March 2004, Moody's Investors Service lowered the bonds from an A3 rating (the seventh highest rating) to Baa3, one notch above junk status. This downgrade was prompted by lower-than-expected revenue "due to weakness in sales for recorded music." A downgrade to an unnamed company that guarantees the issue was also cited as a reason for the downgrade. The success of Apple's iTunes and other legal online music retailers has led to a renewed interest in Bowie and Pullman Bonds. At this time, Bowie Bonds are not available to individual investors.
Thursday, April 12, 2007
California electricity crisis caused due to electricity derivatives trading ?
The California electricity crisis (also known as the Western Energy Crisis) of 2000 and 2001 resulted from the gaming of a partially deregulated California energy system by energy companies such as Enron and Reliant Energy. The energy crisis was characterized by a combination of extremely high prices and rolling blackouts. Price instability and spikes lasted from May 2000 to September 2001. Rolling blackouts began in June 2000 and recurred several times in the following 12 months.
Controversy
While initially the cause of the crisis was defined as being caused either by poorly structured deregulation or by market manipulation, after extensive investigation The Federal Energy Regulatory Commission (FERC) concluded in 2003:[2]
"...supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful."
"...many trading strategies employed by Enron and other companies violated the anti-gaming provisions..."
"Electricity prices in California’s spot markets were affected by economic withholding and inflated price bidding, in violation of tariff anti-gaming provisions."
In summary, poorly structured deregulation which relied on active policing by the FERC led to situations where energy companies could manipulate the California energy market with near impunity and reap substantial profits at the expense of California energy consumers and the State.
Most proponents of deregulation suggest that the major flaw of the deregulation scheme was that it was an incomplete deregulation -- that is, "middleman" utility distributors continued to be regulated and forced to charge fixed prices, and continued to have limited choice in terms of electricity providers. Other, less catastrophic energy deregulation schemes have generally deregulated utilities but kept the providers regulated, or deregulated both.
California's utilities came to depend in part on the import of excess hydroelectricity from the Pacific Northwest states of Oregon and Washington. California's groundbreaking clean air standards favored in-state electricity generation which burned natural gas because of its lower emissions, as opposed to coal whose emissions are more toxic and release more pollutants. In the summer of 2000 a drought in the North West states reduced the amount of hydroelectric power that was available to California, though at no point during the crisis was California's sum of [actual electric-generating capacity]+[out of state supply] less than demand. Rather, California's energy reserves were low enough that during peak hours the private industry which owned power-generating plants could effectively hold the State hostage by shutting down their plants for "maintenance" in order to manipulate supply and demand. These critical shutdowns often occurred for no other reason than to force California's electricity grid managers into a position where they would be forced to purchase electricity from other suppliers who could charge astronomical rates. Even though these rates were semi-regulated, the companies (which included Enron and Reliant Energy) controlled the supply of natural gas as well. Under regulation the price of natural gas dictated the price of electricity, so manipulation by the industry of natural gas prices resulted in higher electricity rates that could be charged under the semi-regulations.
In addition, the energy companies took advantage of California's electrical infrastructure weakness. The main line which allowed electricity to travel from the north to the south, Path 15, had not been improved for many years and became a major bottleneck (congestion) point which limited the amount of power that could be sent south to 3,900 MW. Without the manipulation by energy companies, this bottleneck was not problematic, but the effects of the bottleneck compounded the price manipulation by hamstringing energy grid managers in their ability to transport electricity from one area to another. With a smaller pool of generators available to draw from in each area, managers were forced to work in two markets to buy energy, both of which were being manipulated by the energy companies.
It is estimated[3] that a 5% lowering of demand would result in a 50% price reduction during the peak hours of the California electricity crisis in 2000/2001. With better demand response the market also becomes more resilient to intentional withdrawal of offers from the supply side.
Regulation and deregulation
The deregulation of the California energy market was supported by a unanimous vote from both parties in the California legislature and signed into law by then-Governor Pete Wilson in 1996. Then-state senator Steve Peace was the chair of the energy committee and the author of the bill that caused deregulation, and is often credited as "the father of deregulation". Wilson admitted publicly that defects in the deregulation system would need fixing by "the next governor".
Part of California's deregulation process, which was promoted as a means of increasing competition, involved the partial divestiture in March 1998 of electricity generation stations by the incumbent utilities, who were still responsible for electricity distribution and were competing with independents in the retail market. A total of 40% of installed capacity - 20,164 megawatts - was sold to what were called "independent power producers." These included Mirant, Reliant, Williams, Dynegy, and AES.
Then, in 2000, wholesale prices were deregulated, but retail prices were regulated for the incumbents as part of a deal with the regulator, allowing the incumbent utilities to recover the cost of assets that would be stranded as a result of greater competition, based on the expectation that "frozen" would remain higher than wholesale prices. This assumption remained true from April 1998 through May 2000.
When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the incumbent utility companies still had to purchase power, albeit at a loss. This allowed independent producers to manipulate prices in the electricity market by withholding electricity generation, arbitraging the price between internal generation and imported (interstate) power, and causing artificial transmission constraints. This was a procedure referred to as "gaming the market." In economic terms, the incumbents who were still subject to retail price caps were faced with inelastic demand (see also: Demand response). They were unable to pass the higher prices on to consumers without approval from the public utilities commission. The affected incumbents were Southern California Edison (SCE) and Pacific Gas & Electric (PG&E). Pro-privatization advocates insist the cause of the problem was that the regulator still held too much control over the market, and true market processes were stymied — whereas opponents of deregulation simply assert that the fully regulated system had worked perfectly well for 40 years, and that deregulation created an opportunity for unscrupulous speculators to wreck a viable system.
Prior to deregulation, the electricity market in California was largely in private hands, though subject to intense regulation. The main players were PG&E, SCE, and San Diego Gas and Electric (SDG&E). Those utility companies were forced to sell their generators to non-regulated private companies such as Enron and Reliant. Ownership of certain power stations was transferred in order to increase competition in the wholesale market. In return for divesting some of their power stations the major utilities negotiated a deal to protect them from their assets being stranded. Part of this deal involved price caps for retail customers.
While the selling of power plants to private companies was labeled "deregulation", in fact Steve Peace and the California legislature expected that there would be regulation from the FERC which would prevent manipulation. The FERC's job, in theory, is to regulate and enforce Federal law which would prevent market manipulation and price manipulation of energy markets. When called upon to regulate the out-of-state privateers which were clearly manipulating the California energy market, the FERC, whose chairman was appointed by President Bush, hardly reacted at all and in fact did not take serious action against Enron, Reliant, or any other privateers. FERC's resources are in fact quite spare in comparison to their entrusted task of policing the energy market.
Market manipulation
As the FERC report concluded, market manipulation was only possible as a result of the complex market design produced by the process of partial deregulation. Manipulation strategies were known to energy traders under names such as "Fat Boy", "Death Star", "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow", "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty".[4] Some of these have been extensively investigated and described in reports.
Megawatt laundering is the term, analogous to money laundering, coined to describe the process of obscuring the true origins of specific quantities of electricity being sold on the energy market. The California energy market allowed for energy companies to charge higher prices for electricity produced out-of-state. It was therefore advantageous to make it appear that electricity was being generated somewhere other than California.
Overscheduling is a term used in describing the manipulation of capacity available for the transportation of electricity along power lines. Power lines have a defined maximum load. Lines must be booked (or scheduled) in advance for transporting bought-and-sold quantities of electricity. "Overscheduling" means a deliberate reservation of more line usage than is actually required and can create the appearance that the power lines are congested. Overscheduling was one of the building blocks of a number of scams. For example, the Death Star group of scams played on the market rules which required the state to pay "congestion fees" to alleviate congestion on major power lines. "Congestion fees" were a variety of financial incentives aimed at ensuring power providers solved the congestion problem. But in the Death Star scenario, the congestion was entirely illusory and the congestion fees would therefore simply increase profits.
In a letter sent from David Fabian to Senator Boxer in 2002, it was alleged that:
"There is a single connection between northern and southern California's power grids. I heard that Enron traders purposely overbooked that line, then caused others to need it. Next, by California's free-market rules, Enron was allowed to price-gouge at will."
As a result of the actions of electricity wholesalers, Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) were buying from a spot market at very high prices but were unable to raise retail rates. PG&E and SoCalEd had racked up $20 Billion in debt by Spring of 2001 (PG&E declared bankruptcy in April of that year), and their credit ratings were reduced to junk status. The financial crisis meant that PG&E and SoCalEd were unable to purchase power on behalf of their customers. The state stepped in on January 17, 2001, having the California Department of Water Resources buy power. By February 1, 2001 this stop-gap measure had been extended and would also include SDG&E. It would not be until January 1, 2003 that the utilities would resume procuring power for their customers.
Between 2000 and 2001, the combined California utilities laid off 1,300 workers, from 56,000 to 54,700, in an effort to remain solvent. San Diego had worked through the stranded asset provision and was in a position to increase prices to reflect the spot market. Small businesses were badly affected.
The involvement of Enron
One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was Enron Corporation. Enron CEO Ken Lay mocked the efforts by the California State government to thwart the practices of the energy wholesalers, saying, "In the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys who can always figure out how to make money."
Enron eventually went bankrupt, and signed a $1.52 billion settlement with a group of California agencies and private utilities on July 16, 2005. However, due to its other bankruptcy obligations, only $202 million of this was expected to be paid. Ken Lay was convicted of multiple criminal charges unrelated to the California energy crisis on May 25, 2006, but he died due to a massive heart attack on July 5 of that year before he could be sentenced.
Enron traded in energy derivatives specifically exempted from regulation by the Commodity Futures Trading Commission. At a Senate hearing in January 2002, Vincent Viola, chairman of the New York Mercantile Exchange -- the largest forum for energy contract trading and clearing -- urged that Enron-like companies, which don't operate in trading "pits" and don't have the same government regulations, be given the same requirements for "compliance, disclosure, and oversight." He asked the committee to enforce "greater transparency" for the records of companies like Enron. In any case, the U.S. Supreme Court had ruled "that FERC has had the authority to negate bilateral contracts if it finds that the prices, terms or conditions of those contracts are unjust or unreasonable." Nevada was the first state to attempt recovery of such contract losses.
Consequences of wholesale price rises on the retail market
Controversy
While initially the cause of the crisis was defined as being caused either by poorly structured deregulation or by market manipulation, after extensive investigation The Federal Energy Regulatory Commission (FERC) concluded in 2003:[2]
"...supply-demand imbalance, flawed market design and inconsistent rules made possible significant market manipulation as delineated in final investigation report. Without underlying market dysfunction, attempts to manipulate the market would not be successful."
"...many trading strategies employed by Enron and other companies violated the anti-gaming provisions..."
"Electricity prices in California’s spot markets were affected by economic withholding and inflated price bidding, in violation of tariff anti-gaming provisions."
In summary, poorly structured deregulation which relied on active policing by the FERC led to situations where energy companies could manipulate the California energy market with near impunity and reap substantial profits at the expense of California energy consumers and the State.
Most proponents of deregulation suggest that the major flaw of the deregulation scheme was that it was an incomplete deregulation -- that is, "middleman" utility distributors continued to be regulated and forced to charge fixed prices, and continued to have limited choice in terms of electricity providers. Other, less catastrophic energy deregulation schemes have generally deregulated utilities but kept the providers regulated, or deregulated both.
California's utilities came to depend in part on the import of excess hydroelectricity from the Pacific Northwest states of Oregon and Washington. California's groundbreaking clean air standards favored in-state electricity generation which burned natural gas because of its lower emissions, as opposed to coal whose emissions are more toxic and release more pollutants. In the summer of 2000 a drought in the North West states reduced the amount of hydroelectric power that was available to California, though at no point during the crisis was California's sum of [actual electric-generating capacity]+[out of state supply] less than demand. Rather, California's energy reserves were low enough that during peak hours the private industry which owned power-generating plants could effectively hold the State hostage by shutting down their plants for "maintenance" in order to manipulate supply and demand. These critical shutdowns often occurred for no other reason than to force California's electricity grid managers into a position where they would be forced to purchase electricity from other suppliers who could charge astronomical rates. Even though these rates were semi-regulated, the companies (which included Enron and Reliant Energy) controlled the supply of natural gas as well. Under regulation the price of natural gas dictated the price of electricity, so manipulation by the industry of natural gas prices resulted in higher electricity rates that could be charged under the semi-regulations.
In addition, the energy companies took advantage of California's electrical infrastructure weakness. The main line which allowed electricity to travel from the north to the south, Path 15, had not been improved for many years and became a major bottleneck (congestion) point which limited the amount of power that could be sent south to 3,900 MW. Without the manipulation by energy companies, this bottleneck was not problematic, but the effects of the bottleneck compounded the price manipulation by hamstringing energy grid managers in their ability to transport electricity from one area to another. With a smaller pool of generators available to draw from in each area, managers were forced to work in two markets to buy energy, both of which were being manipulated by the energy companies.
It is estimated[3] that a 5% lowering of demand would result in a 50% price reduction during the peak hours of the California electricity crisis in 2000/2001. With better demand response the market also becomes more resilient to intentional withdrawal of offers from the supply side.
Regulation and deregulation
The deregulation of the California energy market was supported by a unanimous vote from both parties in the California legislature and signed into law by then-Governor Pete Wilson in 1996. Then-state senator Steve Peace was the chair of the energy committee and the author of the bill that caused deregulation, and is often credited as "the father of deregulation". Wilson admitted publicly that defects in the deregulation system would need fixing by "the next governor".
Part of California's deregulation process, which was promoted as a means of increasing competition, involved the partial divestiture in March 1998 of electricity generation stations by the incumbent utilities, who were still responsible for electricity distribution and were competing with independents in the retail market. A total of 40% of installed capacity - 20,164 megawatts - was sold to what were called "independent power producers." These included Mirant, Reliant, Williams, Dynegy, and AES.
Then, in 2000, wholesale prices were deregulated, but retail prices were regulated for the incumbents as part of a deal with the regulator, allowing the incumbent utilities to recover the cost of assets that would be stranded as a result of greater competition, based on the expectation that "frozen" would remain higher than wholesale prices. This assumption remained true from April 1998 through May 2000.
When electricity wholesale prices exceeded retail prices, end user demand was unaffected, but the incumbent utility companies still had to purchase power, albeit at a loss. This allowed independent producers to manipulate prices in the electricity market by withholding electricity generation, arbitraging the price between internal generation and imported (interstate) power, and causing artificial transmission constraints. This was a procedure referred to as "gaming the market." In economic terms, the incumbents who were still subject to retail price caps were faced with inelastic demand (see also: Demand response). They were unable to pass the higher prices on to consumers without approval from the public utilities commission. The affected incumbents were Southern California Edison (SCE) and Pacific Gas & Electric (PG&E). Pro-privatization advocates insist the cause of the problem was that the regulator still held too much control over the market, and true market processes were stymied — whereas opponents of deregulation simply assert that the fully regulated system had worked perfectly well for 40 years, and that deregulation created an opportunity for unscrupulous speculators to wreck a viable system.
Prior to deregulation, the electricity market in California was largely in private hands, though subject to intense regulation. The main players were PG&E, SCE, and San Diego Gas and Electric (SDG&E). Those utility companies were forced to sell their generators to non-regulated private companies such as Enron and Reliant. Ownership of certain power stations was transferred in order to increase competition in the wholesale market. In return for divesting some of their power stations the major utilities negotiated a deal to protect them from their assets being stranded. Part of this deal involved price caps for retail customers.
While the selling of power plants to private companies was labeled "deregulation", in fact Steve Peace and the California legislature expected that there would be regulation from the FERC which would prevent manipulation. The FERC's job, in theory, is to regulate and enforce Federal law which would prevent market manipulation and price manipulation of energy markets. When called upon to regulate the out-of-state privateers which were clearly manipulating the California energy market, the FERC, whose chairman was appointed by President Bush, hardly reacted at all and in fact did not take serious action against Enron, Reliant, or any other privateers. FERC's resources are in fact quite spare in comparison to their entrusted task of policing the energy market.
Market manipulation
As the FERC report concluded, market manipulation was only possible as a result of the complex market design produced by the process of partial deregulation. Manipulation strategies were known to energy traders under names such as "Fat Boy", "Death Star", "Forney Perpetual Loop", "Ricochet", "Ping Pong", "Black Widow", "Big Foot", "Red Congo", "Cong Catcher" and "Get Shorty".[4] Some of these have been extensively investigated and described in reports.
Megawatt laundering is the term, analogous to money laundering, coined to describe the process of obscuring the true origins of specific quantities of electricity being sold on the energy market. The California energy market allowed for energy companies to charge higher prices for electricity produced out-of-state. It was therefore advantageous to make it appear that electricity was being generated somewhere other than California.
Overscheduling is a term used in describing the manipulation of capacity available for the transportation of electricity along power lines. Power lines have a defined maximum load. Lines must be booked (or scheduled) in advance for transporting bought-and-sold quantities of electricity. "Overscheduling" means a deliberate reservation of more line usage than is actually required and can create the appearance that the power lines are congested. Overscheduling was one of the building blocks of a number of scams. For example, the Death Star group of scams played on the market rules which required the state to pay "congestion fees" to alleviate congestion on major power lines. "Congestion fees" were a variety of financial incentives aimed at ensuring power providers solved the congestion problem. But in the Death Star scenario, the congestion was entirely illusory and the congestion fees would therefore simply increase profits.
In a letter sent from David Fabian to Senator Boxer in 2002, it was alleged that:
"There is a single connection between northern and southern California's power grids. I heard that Enron traders purposely overbooked that line, then caused others to need it. Next, by California's free-market rules, Enron was allowed to price-gouge at will."
As a result of the actions of electricity wholesalers, Southern California Edison (SCE) and Pacific Gas & Electric (PG&E) were buying from a spot market at very high prices but were unable to raise retail rates. PG&E and SoCalEd had racked up $20 Billion in debt by Spring of 2001 (PG&E declared bankruptcy in April of that year), and their credit ratings were reduced to junk status. The financial crisis meant that PG&E and SoCalEd were unable to purchase power on behalf of their customers. The state stepped in on January 17, 2001, having the California Department of Water Resources buy power. By February 1, 2001 this stop-gap measure had been extended and would also include SDG&E. It would not be until January 1, 2003 that the utilities would resume procuring power for their customers.
Between 2000 and 2001, the combined California utilities laid off 1,300 workers, from 56,000 to 54,700, in an effort to remain solvent. San Diego had worked through the stranded asset provision and was in a position to increase prices to reflect the spot market. Small businesses were badly affected.
The involvement of Enron
One of the energy wholesalers that became notorious for "gaming the market" and reaping huge speculative profits was Enron Corporation. Enron CEO Ken Lay mocked the efforts by the California State government to thwart the practices of the energy wholesalers, saying, "In the final analysis, it doesn't matter what you crazy people in California do, because I got smart guys who can always figure out how to make money."
Enron eventually went bankrupt, and signed a $1.52 billion settlement with a group of California agencies and private utilities on July 16, 2005. However, due to its other bankruptcy obligations, only $202 million of this was expected to be paid. Ken Lay was convicted of multiple criminal charges unrelated to the California energy crisis on May 25, 2006, but he died due to a massive heart attack on July 5 of that year before he could be sentenced.
Enron traded in energy derivatives specifically exempted from regulation by the Commodity Futures Trading Commission. At a Senate hearing in January 2002, Vincent Viola, chairman of the New York Mercantile Exchange -- the largest forum for energy contract trading and clearing -- urged that Enron-like companies, which don't operate in trading "pits" and don't have the same government regulations, be given the same requirements for "compliance, disclosure, and oversight." He asked the committee to enforce "greater transparency" for the records of companies like Enron. In any case, the U.S. Supreme Court had ruled "that FERC has had the authority to negate bilateral contracts if it finds that the prices, terms or conditions of those contracts are unjust or unreasonable." Nevada was the first state to attempt recovery of such contract losses.
Consequences of wholesale price rises on the retail market
Tuesday, April 10, 2007
Are We ready for electricity futures ?
Electricity ,Futures Trading! – Its Shocking…..
Electricity lends itself to futures trading. It meets the three broad criteria needed for successful futures markets:
- prices are volatile;
- there is a large, diverse universe of buyers and sellers;
- and the physical product is fungible.
The Exchange clearinghouse provides a system of guarantees that mitigates counterparty credit risk.
Indian Scenario
In India with the imminent opening of the power sector including re doing of archaically laws and powers employed with the constitutional authorities such as the regulatory authorities(Varies ERC's) The competitive market in India would develop through structural changes in the power industry that have evolved in recent years, resulting in opportunities, price volatility, and market risk.
Barriers to the development of the Indian electricity derivatives market
The physical supply system is still encumbered by the british legacy of vertical integration.
Electricity markets are subject to Central and State regulations that are still evolving.
As a commodity, electricity has many unique aspects, including instantaneous delivery, non-storability, an interactive delivery system, and extreme price volatility.
The complexity of electricity spot markets is not conducive to common futures transactions.
There are also substantial problems with price transparency, modeling of derivative instruments, effective arbitrage, credit risk, and default risk.
How should the contract be ?
Greater market participation is a key issue for the emerging rather "under supplied" Indian power market.
In an effort to address this, the Indian exchanges in consultation with regulators has to create a contract that reduces the barriers to market entry by removing the requirement for underlying physical OTC contracts and signatory status.
The Unique Nature of Electricity as a Commodity
Storage and Real-Time Balance
The two most significant characteristics of electricity are that it cannot be easily stored and it flows at the speed of light. As a result, electricity must be produced at virtually the same instant that it is consumed, and electricity transactions must be balanced in real time on an instantaneous spot market. Electricity's real-time market contrasts sharply with the markets for other energy commodities, such as natural gas, oil, and coal, in which the underlying commodity can be stocked and dispensed over time to deal with peaks and troughs in supply and demand.
Real-time balancing requirements also complicate the market settlement process. Some electricity market transactions occur before the system constraints are fully known or the price is calculated. In extreme cases, the settlement price may be readjusted up to several months later
Electricity is typically "stored" in the form of spare generating capacity and fuel inventories at power stations. For existing plants, the "storage costs" are usually less than or equivalent to the costs of storing other energy fuels; however, the addition of new storage capacity ( i.e., power stations) can be very capital intensive. The high cost of new capacity also means that there are disincentives to building spare power capacity. Instead, existing plants must be available to respond to the strong local, weather-related, and seasonal patterns of electricity demand. Over the course of a year or even a day, electricity demand cycles through peaks and valleys corresponding to changes in heating or air conditioning loads. Two distinct diurnal electricity markets also exist, corresponding to the on-peak and off-peak load periods. Each of these markets has its own volatility characteristics and associated price risks.
Regulatory Challenges Ahead for Electricity Derivatives – Watch out No more Enron "Death Stars" The Jurisdictional Interplay Between the FMC and CERC
Financial Risk to Ratepayers. The financial risks resulting from the use of derivatives are illustrated by the number of companies that have suffered significant losses in derivative markets. Large losses can be the result of well-intentioned hedging activities or of wanton speculation. In either case, regulators must be concerned with the impact that such losses could have on ratepayers who, absent protections, might be placed at financial risk for large losses
Market Power.
The preceding paragraphs has illustrated the complexity and non-homogeneity of the electricity markets.
Amid this dynamic environment, opportunities abound for market power and gaming strategies to develop.
Controlling this potential threat to competitive markets will require substantial regulatory review, as well as physical changes in the marketplace itself. In many areas of the country, only a small number of suppliers are capable of delivering power to consumers on a particular bus bar, and each of the suppliers can easily anticipate the bids of the others. In such "thin" markets, the price of electricity can be driven by market power rather than by the marginal costs of production.
The need for overall market transparency will be critical to traders and to the market monitors.
Conservation and Demand.
One of the key tools available to regulators for reducing the volatility of electricity prices is demand-side management programs. Electricity prices are likely to be most volatile during the on-peak hours of the day and substantially more stable (and lower) during the off-peak periods.
This fact, coupled with the hockey stick shaped supply cost curve suggests that substantial reductions in volatility could be achieved through the use of market mechanisms and demand-side management programs to shift consumption to off-peak hours. State and Federal authorities have been examining a variety of possible methods for shifting consumer demand for electricity; however, one of the most direct methods—real-time pricing for large electricity consumers—remains largely untapped.
Ideal features of the contract
Baseload and Peakload contracts shoul;d be listed based on the power supply calendar and settlement cycle favoured by the industry with 12 months, 6 quarters and 4 seasons;
No requirement to be a power supplier party;
Margin offset between Electricity Futures and Natural Gas Futures/Coal Futures/Crude Oil Futures;
Each contract will be physically deliverable and will be cleared by one central counterparty,
Minimum trading size will be 10 lots;
Months, Quarters and Seasons will be listed in parallel – no cascading;
All positions will be held as months for maximum flexibility for participants;
There should ideally be 50% margin offsets between Peak and Base Load contracts;
Inter-month spreads should be made available and there will be price implication down the curve;
Outright margin rates are envisaged to be about Rs. 136 per MWh for baseload contracts and Rs. 248 per MWh for peakload contracts.
Inter-month spread rates are envisaged to be Rs. 180/- per MWh for baseload contracts and Rs. 300 per MWh for peakload contracts;
The Contracts will initially be available for trading through existing commodity exchanges and will then be rolled out to ISV solutions
The Exchanges should provide financially settled monthly futures contracts for on-peak and off-peak electricity transactions based on the daily floating price for each peak day of the month at the respective regional hub. For eg The western hub could consist of delivery points, primarily on the BSES /TATA Power transmission systems.
Additional risk management and trading opportunities should be offered through options on the monthly futures contract
The peak daily floating prices should be the weighted exponential average of say the western hub real-time locational marginal pricing for the 16 peak hours of each peak day, provided by the Utility service providers in the western hub.
Peak hours should be designated from 7:00 AM to 11:00 PM (the hour ending 0800 to the hour ending 2300) prevailing local time.
Peak days are Mondays through Fridays, excluding the Railways consumption.
Off-peak hours are from midnight to 7:00 AM (the hour ending 0100 to the hour ending 0700) and 11:00 PM to midnight (the hour ending 2400) Mondays through Fridays; also, all day Saturdays and Sundays (the hour ending 0100 to the hour ending 2400). All times are prevailing local time Locational marginal pricing is the marginal cost of supplying the next increment of power demand at a specific location on the network, taking into account the marginal cost of generation and the physical aspects of the transmission system
Quality Specification
Electric energy delivered under this contract shall be in the form of three phase current alternating at a nominal frequency as prescribed by the Central Electricity regulatory authority, and be in conformance with the specifications of the CERC.
TRANSMISSION
Except as set forth in , seller shall be required to make all transmission arrangements to deliver electric energy to central buyers, and buyer shall be required to make all transmission arrangements to receive electric energy at Central sellers
Alternative Delivery Procedure
seller or buyer may agree with the buyer or seller with which it has been matched by the Exchange Rules to make and take delivery under terms or conditions which differ from the terms and conditions prescribed by the exchange. In such a case, Clearing Members shall execute an Alternative Delivery Notice on the form prescribed by the Exchange and shall deliver a completed executed copy of such Notice to the Exchange. The delivery of an executed Alternative Delivery Notice to the Exchange shall release the Clearing Members and the Exchange from their respective obligations under the Exchange contracts.
In executing such Notice, Clearing Members shall indemnify the Exchange against any liability, cost or expense it may incur for any reason as a result of the execution, delivery or performance of such contracts or such agreement, or any breach thereof or default thereunder. Upon receipt of an executed Alternative Delivery Notice, the Exchange will return to the Clearing Members all margin monies held for the account of each with respect to the contracts involved.
Conclusion
There is an urgent impending need for a market driven ,vibrant instrument for electricity futures which would attract huge market participation automatically.
The electricity futures/options markets may provide useful information about forward prices. Futures prices represent the market participants' forecasts of what future spot prices will be. An essential feature of electricity futures contracts (for delivery at a specific location) is that as the delivery date of the futures contract approaches, the futures contract price and the spot price will converge. While the futures contract prices provide forecasts of forward spot prices, there is no assurance that the forecast will be correct, although the forecast error can be expected to diminish, the shorter the time remaining to futures contract maturity.
To start with futures price data may provide imperfect information for estimating forward contracts prices because of locational and product differences. As mentioned above, locational differences in spot price may make the spot price at one location in south India a poor proxy for the market clearing price for another location say Mumbai. Similarly, the price for a futures contract for delivery at one location may not be a good proxy for the price of a futures contract at another location. Product differences could also occur because the product specification for a tradeable futures contract may not adequately reflect the product (primarily in terms of delivery schedule) specifications for a forward contract.
The power and natural gas markets are interesting examples of the spectrum of wholesale commodity transactions. Historically, the regulation of those transactions was largely separated between CERC, which primarily regulates physical transactions, and the FMC which primarily regulates commodity derivatives transactions
Policy makers need to consider carefully whether the current regulatory structure should be modified. If they conclude that the answer is yes, they should be careful to ensure that any change in the regulatory scheme does not stifle innovation and increased efficiency in these emerging commodity derivatives markets
Wednesday, March 28, 2007
Altos derivatives exchange for IP rights(ADEXIP)
Current methods of intellectual property exchange are inefficient and often hinder companies from easily realizing value from existing IP assets. In addition, intellectual property enforcement is costly and uncertain and entails lengthy negotiations or legal actions.
As a result, necessary IP rights are not effectively transferred, the “best price” for IP is rarely achieved, and the process itself inhibits the market adoption of new technology based products and hence their companies’ economic growth.
What is Intellectual capital ?
Intellectual capital is a term with various definitions in different theories of economics. Accordingly its only truly neutral definition is as a debate over economic "intangibles". Ambiguous combinations of instructional capital and individual capital employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a capital asset whose yield is intellectual rights.
Such use is rare, however, and the term rarely or never appears in accounting proper - it refers to a debate, and to the assumed capital base that creates intellectual property, rather than an auditable style of capital.
Perhaps due to their industry focus, the term "intellectual capital" is employed mostly by theorists in information technology, innovation research, technology transfer and other fields concerned primarily with technology, standards, and venture capital. It was particularly prevalent in 1995-2000 as theories proliferated to explain the "dotcom boom" and high valuations. During this period it was often observed that computer code and programmers were bearing a substantial premium when combined in new unproven companies. It is hard to see how this differs from the tulip boom, however, when it would have been just as likely to assign a high value to the seemingly-magical combinations of tulip bulbs and, say, the pots they grew in.
Brand as an Asset
Whether flags, brands, labels or simple fear dominate economic decisions, it seems that the underlying theories of intellectual capital and of human capital don't explain them. When attached to "capital" as prefixes, the terms "intellectual", "knowledge" and "human" often conceal more than their use can reveal. Thus the terms intellectual capital, knowledge capital and human capital more properly describe debates, not assets, as internally generated assets do not appear on a balance sheet, however International Financial Reporting Standard 3 on Business Combinations requires acquired intangible assets to be accounted for during the purchase price allocation exercise. They produce neat abstractions but so far poorly explain what actually occurs in the biologically real world: individuals buying in a social setting based on instructions.
So far, the more specific terms "individual", "instructional" and "social" from human development theory, have been preferred in Wikipedia as adjectives describing classes of capital. In part this is because these terms have definitions that arise from academic categories and practices rather than faddish marketing or management theories. There are standards for assigning value to these, e.g. the UN Human Development Index which literally ranks flags (of countries) for quality of life.
Extending such standards to labels (via mandatory labelling) and applying them positively in brand management, e.g. positioning a brand for appeal to an ethical minority, is increasingly common. Projects by Consumerium and AdBusters seek to make comprehensive outcomes more important in buying decisions. This in turn is part of a trend towards more moral purchasing.
When viewed as an asset, then, a brand is simple social capital that may have an increasing amount of instructional capital attached to satisfy an ever-rising demand for more information about product origin, production and distribution.
why should any asset be intangeible ?
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort.[1] There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how,knowledge), collaboration activities, leverage activities, and structural activities. Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price. Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed.
To achieve the objectives of the Intellectual Property Enhancement Program, Altos will explore and develop ways to consolidate IP rights more efficiently for its IPEP participants. The development of new IP exchange practices ultimately may lead to the creation of an operating Intellectual Property Rights Exchange in the future, providing for the efficient open market trading of various direct(spot/cash) and derivative IP-based license, debt equity and hybrid investments.
Such an exchange could bring together IP owners, consumers and investors with a solution for current market inefficiency and provide companies with a mechanism for funding additional innovation, reducing their exposure to legal actions, and increasing their access to underutilized patents and technologies. It is our objective that as a result, faster commercialization of technology will accelerate long-term economic growth.
Different types of trading activities may be developed, bound by the common principles of consistent transaction termsand market pricing. Transactions might be for license rights (e.g., for a specific quantity of production), for ownership rights (e.g., via an open auction), or for various kinds of derivative rights based on specific conditions affecting the underlying asset value.
We anticipate that through our practical experience with the acquisition and out-licensing of IP
rights for IPEP participants, viable long-term mechanisms for open trading will be developed.
Companies that would be admitted into AltosIPexchange agree to participate in this development program, as may financial firm members that have investment interests in IP or IP-owning companies, thus providing a test bed for the creation of practical exchange practices. The program will direct the manner in which the intellectual property rights, either owned by these companies or acquired on their behalf, will be transferred to third parties in accordance with the owners’ objectives. This will relieve the company of the burden of establishing and
administering a licensing program to maximize the value of their IP and will provide investors in IP an avenue for marketing those rights instead of engaging in inefficient, costly and unfamiliar licensing negotiations.
Where all could the applications be ?
1. Under the most recent context global sporting events like the current (2007) world cup, an exchange for derivatives comprising of notional cash value of say runs scored by a batsman, a basket of such values could be securitized and be traded on an exchange, in lay man terms an Exchange which will have an instrument SachinAPRIL 30, i.e a derivatives instrument whose pay off would be linked to the runs scored by sachin as of april 30th or AUSTRALIAWC07APRIL30 this market could then attract participants like advertisers,media channels,branders,consumers investors and speculators.
2. Film and Movie Industry : an active and liquid market comprising of actors,technicians,financiers,producers,investors,distrubutors,advertisers media channels and end consumners(the guy who pays money and buys ticket/dvds)
3. Software and Products company.
4. Architectural firms,building, construction and real estate companies. Eg RELIANCESEZNEAR MUMBAI 2011 futures.
5. Art and artwork.
As a result, necessary IP rights are not effectively transferred, the “best price” for IP is rarely achieved, and the process itself inhibits the market adoption of new technology based products and hence their companies’ economic growth.
What is Intellectual capital ?
Intellectual capital is a term with various definitions in different theories of economics. Accordingly its only truly neutral definition is as a debate over economic "intangibles". Ambiguous combinations of instructional capital and individual capital employed in productive enterprise are usually what is meant by the term, when it is used to actually refer to a capital asset whose yield is intellectual rights.
Such use is rare, however, and the term rarely or never appears in accounting proper - it refers to a debate, and to the assumed capital base that creates intellectual property, rather than an auditable style of capital.
Perhaps due to their industry focus, the term "intellectual capital" is employed mostly by theorists in information technology, innovation research, technology transfer and other fields concerned primarily with technology, standards, and venture capital. It was particularly prevalent in 1995-2000 as theories proliferated to explain the "dotcom boom" and high valuations. During this period it was often observed that computer code and programmers were bearing a substantial premium when combined in new unproven companies. It is hard to see how this differs from the tulip boom, however, when it would have been just as likely to assign a high value to the seemingly-magical combinations of tulip bulbs and, say, the pots they grew in.
Brand as an Asset
Whether flags, brands, labels or simple fear dominate economic decisions, it seems that the underlying theories of intellectual capital and of human capital don't explain them. When attached to "capital" as prefixes, the terms "intellectual", "knowledge" and "human" often conceal more than their use can reveal. Thus the terms intellectual capital, knowledge capital and human capital more properly describe debates, not assets, as internally generated assets do not appear on a balance sheet, however International Financial Reporting Standard 3 on Business Combinations requires acquired intangible assets to be accounted for during the purchase price allocation exercise. They produce neat abstractions but so far poorly explain what actually occurs in the biologically real world: individuals buying in a social setting based on instructions.
So far, the more specific terms "individual", "instructional" and "social" from human development theory, have been preferred in Wikipedia as adjectives describing classes of capital. In part this is because these terms have definitions that arise from academic categories and practices rather than faddish marketing or management theories. There are standards for assigning value to these, e.g. the UN Human Development Index which literally ranks flags (of countries) for quality of life.
Extending such standards to labels (via mandatory labelling) and applying them positively in brand management, e.g. positioning a brand for appeal to an ethical minority, is increasingly common. Projects by Consumerium and AdBusters seek to make comprehensive outcomes more important in buying decisions. This in turn is part of a trend towards more moral purchasing.
When viewed as an asset, then, a brand is simple social capital that may have an increasing amount of instructional capital attached to satisfy an ever-rising demand for more information about product origin, production and distribution.
why should any asset be intangeible ?
Intangible assets are defined as those non-monetary assets that cannot be seen, touched or physically measured and which are created through time and/or effort.[1] There are two primary forms of intangibles - legal intangibles (such as trade secrets (e.g., customer lists), copyrights, patents, trademarks, and goodwill) and competitive intangibles (such as knowledge activities (know-how,knowledge), collaboration activities, leverage activities, and structural activities. Legal intangibles generate legal property rights defensible in a court of law. Competitive intangibles, whilst legally non-ownable, directly impact effectiveness, productivity, wastage, and opportunity costs within an organization - and therefore costs, revenues, customer service, satisfaction, market value, and share price. Human capital is the primary source of competitive intangibles for organizations today. Competitive intangibles are the source from which competitive advantage flows, or is destroyed.
To achieve the objectives of the Intellectual Property Enhancement Program, Altos will explore and develop ways to consolidate IP rights more efficiently for its IPEP participants. The development of new IP exchange practices ultimately may lead to the creation of an operating Intellectual Property Rights Exchange in the future, providing for the efficient open market trading of various direct(spot/cash) and derivative IP-based license, debt equity and hybrid investments.
Such an exchange could bring together IP owners, consumers and investors with a solution for current market inefficiency and provide companies with a mechanism for funding additional innovation, reducing their exposure to legal actions, and increasing their access to underutilized patents and technologies. It is our objective that as a result, faster commercialization of technology will accelerate long-term economic growth.
Different types of trading activities may be developed, bound by the common principles of consistent transaction termsand market pricing. Transactions might be for license rights (e.g., for a specific quantity of production), for ownership rights (e.g., via an open auction), or for various kinds of derivative rights based on specific conditions affecting the underlying asset value.
We anticipate that through our practical experience with the acquisition and out-licensing of IP
rights for IPEP participants, viable long-term mechanisms for open trading will be developed.
Companies that would be admitted into AltosIPexchange agree to participate in this development program, as may financial firm members that have investment interests in IP or IP-owning companies, thus providing a test bed for the creation of practical exchange practices. The program will direct the manner in which the intellectual property rights, either owned by these companies or acquired on their behalf, will be transferred to third parties in accordance with the owners’ objectives. This will relieve the company of the burden of establishing and
administering a licensing program to maximize the value of their IP and will provide investors in IP an avenue for marketing those rights instead of engaging in inefficient, costly and unfamiliar licensing negotiations.
Where all could the applications be ?
1. Under the most recent context global sporting events like the current (2007) world cup, an exchange for derivatives comprising of notional cash value of say runs scored by a batsman, a basket of such values could be securitized and be traded on an exchange, in lay man terms an Exchange which will have an instrument SachinAPRIL 30, i.e a derivatives instrument whose pay off would be linked to the runs scored by sachin as of april 30th or AUSTRALIAWC07APRIL30 this market could then attract participants like advertisers,media channels,branders,consumers investors and speculators.
2. Film and Movie Industry : an active and liquid market comprising of actors,technicians,financiers,producers,investors,distrubutors,advertisers media channels and end consumners(the guy who pays money and buys ticket/dvds)
3. Software and Products company.
4. Architectural firms,building, construction and real estate companies. Eg RELIANCESEZNEAR MUMBAI 2011 futures.
5. Art and artwork.
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