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A Farm Bill Primer: 10 Things You Should Know About the Farm Bill
By Daren Bakst and Diane Katz May 14, 2013 Abstract Congress is once again preparing to take up the “farm bill,” a multi-billion-dollar tangle of agriculture subsidies, welfare payments, and environmental patronage. The time is particularly ripe to create meaningful reform and reduce the excessive burden imposed on taxpayers and consumers. Farmers are pulling in record levels of income and carrying record-low levels of debt. Agriculture policy must be freed from the politics of welfare and the blight of farm subsidies, price controls, and tariffs that do more harm than good. Congress is preparing once again to take up the “farm bill,” a multi-billion-dollar tangle of agriculture subsidies, welfare payments, and environmental patronage. There is tremendous need for reform. Current subsidy programs are rooted in the 1930s, when prices for crops and livestock bottomed out and farm families were desperate for income. Agriculture today could not be more different. Farmers are pulling in record-high levels of income and carrying record-low levels of debt. Technology has eliminated many of the risks that once plagued farming, and the profitability of unsubsidized crops demonstrates that independent agriculture is viable. So there is no way to justify continuing to give tens of billions of dollars to the farm industry. The previous farm bill—the Food, Conservation, and Energy Act of 2008—expired on September 30, 2012. Last year, the Senate approved a proposed bill renewal, but the House did not take a floor vote on its own legislation. Instead, lawmakers extended most programs through 2013. Now Congress is preparing another farm bill. The right reforms would end the perverse subsidies to profitable agricultural enterprises paid by middle-class taxpayers. It would eliminate the tariffs and quotas and price “supports” that artificially inflate food prices—and the family grocery bill. And a new approach to agriculture policy would liberate farmers whose decisions are routinely dictated by government. The benefits of reform are as abundant as America’s food supply. 1. What Is the Farm Bill? The “farm bill” is a misleading title for this recurring legislation. It is really a food stamp bill that also includes agriculture subsidies. The vast majority of spending—about 80 percent in the 2008 bill—is dedicated to food stamps [1] and other nutrition programs. Congress has expanded the farm bill over time into a costly compilation of disparate programs. Along with agriculture and food stamps, the legislation includes dozens of forestry, conservation, energy, and rural development programs. This amalgam of special interests resists meaningful reform. The first farm bill, the Agricultural Adjustment Act of 1933, was a New Deal response to severely depressed commodity prices. In the depths of the Great Depression, farm products were not selling, of course, and the excess supply undercut their value. The goal of the act was to raise prices by restricting production of corn, wheat, cotton, rice, peanuts, tobacco, and milk. Farmers were paid to keep fields fallow with funds generated by a tax on food processors (a levy later deemed unconstitutional by the U.S. Supreme Court [2] ). Taxpayers have been on the hook ever since. 2. What Is the Status of the Farm Bill? The most recent farm bill, the Food, Conservation, and Energy Act of 2008, was 1,770 pages of agriculture subsidies, expanded food stamp eligibility, and massive spending on forestry, telecommunications, energy, and rural development. The 2008 act expired on September 30, 2012. The Senate, on June 21, 2012, approved a new five-year bill (S. 3240) with proposed outlays of $970 billion over 10 years. [3] The bill repealed a set of wasteful and antiquated subsidies, but also established an expanded insurance program to cover relatively minor losses that would have likely cost more than the savings from ending direct payments. On July 11, 2012, the House Committee on Agriculture reported out its version (H.R. 6083), with proposed outlays of $958 billion over 10 years; the legislation, however, failed to advance to a floor vote. The House legislation would have eliminated direct payments, but created a new subsidy to cover potential declines in commodity prices. Similar to the Senate measure, the proposed new subsidy in the House bill would have likely negated all the savings from eliminating the direct payments. Subsequently, Congress extended the 2008 farm bill for the 2013 fiscal year and 2013 crop year. [4] Both chambers are now crafting new bills in advance of the September 30, 2013, expiration. [5] 3. Why Is the Food Stamp Program a Part of the Farm Bill? In plain terms, merging food stamps with farm subsidies produces more support for expanding both than either bloc could possibly muster on its own. The food stamp portion creates a reason for urban representatives to support farm subsidies, and for farm-state lawmakers to support food stamps. Talk of de-politicizing agriculture programs and welfare policy is met with stiff resistance. For example, Senator Thad Cochran (R–MS), ranking Republican on the Senate Agriculture Committee, recently told the North American Agricultural Journalists group that food stamps should continue to be included in the farm bill “purely from a political perspective. It helps get the farm bill passed.” [6] 4. What Is the Condition of U.S. Agriculture? American agriculture has changed dramatically since most farm programs were conceived. Advances in agronomy, biotechnology, pest control, and disease management have profoundly reduced risk and improved productivity. Yields per acre of staples, such as corn, soy, wheat, and cotton, have doubled, tripled, or quadrupled in a matter of decades. [7 ] Net farm income (what farmers earn after expenses) is expected to reach a remarkable $128.2 billion this year—the highest level since 1973. Commodity prices are riding high on global food demand, a relatively weak dollar, and demand for “bio-fuels.” [8] Farmers also are carrying far less debt compared to their burgeoning assets. Overall, current farm debt is only about one-tenth of total assets—the strongest position in about 40 years. [9] And the number of farms assuming debt financing declined by half (from 60 percent to 31 percent) between 1986 and 2007. The number of farms also has dramatically changed, decreasing from a peak of 6.8 million in 1935 to 2.2 million in 2010. [10] During that same period, the amount of land in farms declined by less than 13 percent. Taken together, the two trends reflect fewer, but larger, farms. Indeed, the number of farms with more than 1,000 acres increased by 14 percent between 1982 and 2002. [11] In the same period, farms with 50 acres to 1,000 acres declined by about 17 percent. Large farms account for the bulk of production. Farms with annual sales exceeding $250,000 constitute just 12 percent of American farms, yet account for 84 percent of production value. Farms with annual sales of less than $250,000 comprise 88 percent of American farms while producing 16 percent of agricultural output. Large farms are generally stronger. They can afford more sophisticated machinery and can take advantage of the latest scientific advances—both of which allow operators to manage more acreage and increase yields. 5. What Are the Various Types of Agriculture Subsidies? Farm subsidies include income support, price controls, operating and land ownership loans, insurance, and disaster relief. Eligibility and benefits vary by program and market conditions. But the underlying result is largely the same: shifting the cost of agricultural risk to taxpayers, either by augmenting farmers’ income or artificially inflating commodity prices. The text box below contains descriptions of key commodity programs. http://www.heritage….Chart750px.ashx 6. How Much Money Is Spent on Farm Bill Programs? Spending for the 2002 farm bill (2003–2007) totaled a whopping $241 billion. [13] At the time of enactment, the 2008 farm bill was estimated to cost $284 billion over five years (and $604 billion over 10 years). [14] However, significantly higher spending on crop insurance and food stamps increased actual outlays. The most recent 10-year cost projections for last year’s Senate and House legislation are $963 billion and $950 billion, respectively, according to the Congressional Budget Office. [15 ] 7. Who Are the Winners and Losers Under the Farm Bill? Many people assume that farm assistance largely benefits small “family farms.” While some smaller operations do receive major subsidies, the big winners actually are large agriculture enterprises. [16] Indeed, the vast majority of larger farms—about 75 percent—collect subsidies compared to only 24 percent of the (relatively) little guys. According to government data, farms with gross sales of $1 million or more received 23 percent of all commodity-related payments in 2009—up from just 8 percent in 1991. [17] In contrast, the share of commodity-related payments received by farms in the $100,000 to $249,999 sales class shrank from 34 percent in 1991 to 15 percent in 2009. [18 ] The subsidies collected by large enterprises make it more difficult for small farms to stay in business. The flow of free dollars to big farms increases demand for farmland, which, in turn, raises the price of property. Smaller players and newcomers are priced out and left to compete in niche markets. It is also notable that Members of Congress and their immediate families are eligible for farm subsidies. Many of the lawmakers assigned to the House and Senate Agriculture Committees are farmers, but taxpayers are prevented from learning who receives crop insurance subsidies and in what amounts. [19 ] 8. Why Are Reforms Necessary? Subsidies are often referred to as a “safety net.” But subsidies produce a perverse double-whammy: taxpayers are hit with underwriting the costs and consumers are slammed with higher prices on groceries. Meanwhile, rather than stabilize crop prices as proponents claim, subsidies promote overproduction and downward pressure on prices—thereby increasing subsidy payouts. And billions of dollars lavished on farmland conservation encourages over-planting on marginal lands that require more chemical management. By lowering the cost of insurance, some farmers are over-insuring, that is, opting for coverage that exceeds their actual degree of risk. Furthermore, people tend to take greater risks—with crop management, in this case—when relieved of the full cost of their actions. Farmers understandably avail themselves of price and income supports available to them, just as any other business does. But these lavish subsidies inflate Americans’ grocery bills. For example, Americans pay two to four times higher prices for sugar than consumers in other countries, on account of government-imposed tariffs on imports and quotas on domestic production. And consumers pay hundreds of millions of dollars more for milk, butter, cheese, and a variety of other dairy products because of government manipulation of supplies and prices. Perhaps most importantly, although separate from agriculture policy, increases in food stamp spending are unsustainable. Outlays for nutrition programs swelled from $37.6 billion in 2008 to an estimated $82 billion this year. 9. Do Farmers Need Government Assistance to Manage Risk? Modern farming is both extremely sophisticated and a source of innovation. Those who work in the agricultural sector are as adept at managing risk as any other business leaders. While farming is risky, so, too, are many other entrepreneurial endeavors. There are several time-tested ways for farmers to manage risk without taxpayer subsidies, including futures contracts and hedging, crop diversification, credit reserves, and private insurance. There could be even more options if Washington loosened its grip on agriculture and allowed entrepreneurs to create new products and services for managing risk. 10. What Should Congress Do? Today’s system of subsidies and artificial price supports for commodities must go. First and foremost, however, a meaningful reform effort requires lawmakers to focus solely on agriculture. All the superfluous programs that clutter the farm bill—food stamps, energy, broadband deployment—ought to be jettisoned to congressional committees that specialize in such issues. It is unlikely, however, that all non-agricultural programs will be removed from the current farm bill—although that should be the goal. Congress can take important incremental steps by eliminating the most costly and indefensible subsidies. Specifically, legislators should target programs that use taxpayer dollars to cover nominal risks. They should also target farm programs that subsidize farmers regardless of whether they grow crops or earn a high income. Specifically, Congress should improve agriculture policy in the following ways: Separate food stamps from agriculture programs. This reform is a matter of open and transparent government. Food stamps and farm policy are distinct issues. Each warrants thoughtful consideration from legislators in congressional committees with appropriate jurisdiction. Combining both into one massive bill undermines chances for accountability and meaningful reform. Limit farm subsidies to farmers with adjusted gross incomes below $250,000. Until subsidies are eliminated, there should at least be a means test to restrict eligibility. Eligibility should be restricted across the board, and the income levels should be significantly reduced to less than the current thresholds. The existing loophole that allows multiple people working one farm to receive subsidies should be eliminated. Eliminate the direct payments program. There is no justification for subsidizing farmers who do not grow crops, or to subsidize farmers regardless of their income. Both the House and Senate bills last year would have eliminated direct payments—evidence of broad recognition that these programs should be eliminated. Cap the crop insurance program on insurance premium subsidies and reduce the percentage of total premiums that taxpayers must subsidize. Crop insurance subsidies have skyrocketed, and are expected to average $8.9 billion a year from 2013–2022, according to the Congressional Budget Office. The Government Accountability Office analyzed the impact of placing a $40,000 cap on premium subsidies received by farmers, if applied in 2011: a savings to taxpayers of $1 billion. This type of cap would only have affected 3.9 percent of participating farmers. [20] By lowering the cap, even greater savings could be achieved. Taxpayers should bear a much smaller burden when it comes to subsidizing premiums. In 2011, taxpayers paid 62 percent of the premium subsidies for the crop insurance program. In 2000, taxpayers covered 37 percent. Simply reducing the 62 percent premium subsidy by 10 percentage points to 52 percent in 2011 would have saved $1.2 billion. [21 ] Do not replace one bad policy with another: Avoiding the “shallow loss” and “price loss coverage” problem. In 2012, the Senate approved repeal of direct payments and counter-cyclical payments. The House bill also would have done the same. But lawmakers negated that progress by replacing direct subsidies with programs that would likely cost taxpayers even more. This is unacceptable. The Way Forward Congress must consider the farm bill in terms of net reform—do the reforms significantly reduce costs to taxpayers and minimize subsidies in total? If not, regardless of what problematic programs have been eliminated, there has not been adequate reform. It is time to free agriculture policy from the politics of welfare and the blight of farm subsidies, price controls, and tariffs that do more harm than good. There are a host of nongovernmental methods with which farmers can manage risk, including futures contracts and hedging, crop diversification, credit reserves, and private insurance. —Daren Bakst is Research Fellow in Agricultural Policy, and Diane Katz is Research Fellow in Regulatory Policy, in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation. Continue reading
The Making Of Emissions Trading Laws – Understanding The EU Legislative Process
Reed Smith LLP Peter Zaman European Union May 9 2013 Introduction Unlike most traded commodity markets, the market for trading carbon credits or emissions allowances in the EU is not one based on its utility, usage or consumption. A carbon credit is not used in manufacturing processes or consumed like power or grain. Its market is entirely an invention of policy as implemented through legislation and regulation with a view to reducing the carbon emissions in the EU. Any demand for a carbon credit or emission allowance (” allowances “), is also therefore a creation of those legislative and regulatory processes. That process has left the EU Emissions Trading Scheme (” EU ETS” ), today in its third phase,1 moribund with an over-supply of allowances.2 Although the EU ETS is a relatively new market, it has certainly had its share of teething problems. Some of these problems (e.g. VAT fraud and addressing security aspects from carbon registry hacking incidents) have been through a lack of foresight on the part of the European Commission (the ” Commission “) and the member states. Others, such as the over-supply problem, have been as a result of a combination of fewer allowances required through financial crisis-induced lower industrial output, and the lack of ambition on the part of the developed world (including the member states) to take on more stringent caps for its emissions output. In the case of each of these problems, the Commission’s response has been to propose more legislation to tweak, amend or revise its original legislation. We have seen three versions of a ‘new’ Registry Regulation3 between 2009 and 2011, and have just had a fourth new version in May 2013. As the Commission proposes various ‘fixes’ or applies band-aids to the various problems it has to address, it sometimes builds on bad policy with more bad policy. The inclusion of the aviation sector within the EU ETS and the subsequent ‘temporary’ exclusion for one year only, springs to mind as a good example of the Commission’s “band-aid” approach to legislative intervention. “Two wrongs don’t make a right” seems an apt description of much of the legislation recently introduced, including some that has been designed to have retrospective effect. Therefore, how does a participant in the carbon market manage risk and uncertainty arising from a volatile and unpredictable legislative process? Unlike any other market, in the EU ETS it becomes essential to understand the legislative process as part of the toolkit of risk management, used by risk managers looking after traders. The importance of understanding the legislative process and the price volatility that can be triggered from a knee-jerk reaction to minor steps in the legislative process, was most visibly seen in the Commission’s recent proposal known as the ‘Backloading’ proposal.4 We will use the ‘Backloading’ proposal as an example to illustrate the legislative process followed in the EU ETS. This client alert seeks to demystify the labyrinth that is the EU rule making process in the EU ETS.5 The Codecision Procedure The most commonly used procedure for making law in the EU is the codecision procedure.6 In the last legislative term (2004- 2009) a total of 447 codecision files were concluded. The first half of the seventh parliamentary term (2009-2011), confirms the trend of first reading agreements: 136 codecision files (78%) were concluded at first reading, 32 (18%) at second reading and 7 (4%) at third reading. With the considerable extension of the scope of the procedure under the Treaty of Lisbon, the number of codecision files is expected to increase in the future.7 Diagram 1 (below) provides a high-level overview of the codecision procedure (a more comprehensive flow diagram has been included at Appendix 1). The majority of EU legislation will not require that the full nine stages of the process be utilised. If the proposed legislation is well supported by the EU Parliament and the Council of the European Union then it is possible that that it will become law after having completed only stages one to five. Click here to view diagram. Stage1: The Commission Proposal The Commission has the right of initiative under the codecision procedure.8 The European Parliament (the ” Parliament “) and the Council of the European Union (the ” Council “) then examine the proposals and suggest amendments before voting on whether the law should pass. Although there are several ways in which the Parliament and the Council can examine laws, the most common method is the codecision procedure. The Commission will place its proposal before the Parliament and the Council simultaneously. Stage 2: First Reading in the Parliament The European Parliament delivers an opinion at first reading. This opinion is prepared at two levels: At parliamentary committee level At plenary level Parliamentary Committee When the Commission text reaches the Parliament, the parliamentary committee responsible (the ” lead committee “), is named along with any other committees that are asked for non-binding opinions. Within the lead committee, the political groups’ coordinators designate a rapporteur entrusted with the drafting of the report containing the proposed amendments, if any, put forward by the Parliament. The parliamentary committees meet several times to study the draft report prepared by the rapporteur, as well as amendments put forward by other MEPs. These parliamentary amendments, as well as those suggested by the individual committee, are put to the vote in the lead committee, on the basis of a simple majority. Only the lead committee9 will have a binding vote, and a simple majority is needed to approve the report before the Commission’s proposal can progress. During the equivalent committee process of the “Backloading” proposal, EU carbon prices slid 40% after the Industry, Research and Energy Committee (ITRE) opposed plans to support the proposal (in January), even though the ITRE’s role was only advisory and the vote was non-binding. This perhaps suggested an overreaction by the market or a limited understanding of the EU legislative process, or perhaps, a little of both. The lead committee11 subsequently voted in favour of the proposal with a stronger-than-expected margin.12 Adoption in Plenary Once the report is adopted at committee level, it then goes to plenary, as both the “Backloading” and “Stop-the-clock”13 proposals did on 16 April 2013. Additional amendments to the report, including amendments adopted in the parliamentary committee, may be tabled by political groups and put to the plenary’s vote. Ahead of the vote, the rapporteurs and shadow rapporteurs present their report, followed by the relevant Commissioner.14 In the first reading, following the opinions at the committee and plenary levels, a simple majority (i.e., majority of MEPs present during the vote) is required to adopt the amendments, either on an amendment-per-amendment basis or “en bloc.” First Reading in the Parliament – Examples of Process In focus: “Backloading” Proposal Rejected by a narrow margin 334 in favour 315 voting against 63 abstaining “Backloading” Proposal The “Backloading” proposal, as referred to in the media, conjoins two separate stages; only the first stage was subject to a plenary vote on 16 April 2013. The first stage, to amend the EU ETS Directive, did not receive the simple majority needed to take it to stage 4 of the legislative process. This has derailed the Commission’s stage 2 plans to implement the amendment to the “Auctioning Regulation.”15 With the rejection of the Commission’s proposal, the Commission could choose to maintain the proposal by going back to the lead committee for amendment to try and gain a position of support at committee level. Recent reports suggest that this will happen, perhaps following the German government’s support for the proposal. The Commission has not formally withdrawn its proposal, as it took the confusion caused during the voting process 16 on 16 April to conclude that the proposal may not be “dead in the water.” When introduced the Backloading Proposal will start from stage 2 above. In focus: “Stop-the-clock” proposal Support by a large margin 577 in favour 114 voting against 21 abstaining “Stop-the-clock” Proposal In contrast, during the same parliamentary session the Parliament voted in favour of and adopted the ‘Stop-the-clock’ proposal. The result of the plenary vote is already being negotiated with the Council (see stage 4 below) and majority support and adoption by the Council without amendment seems very likely. Stage 4: First Reading of the Council The Council examines the Commission’s initial proposal in parallel to the Parliament. This work is conducted within specific working parties, made up of representatives of the member states and chaired by the representative of the member state holding the presidency. The Commission attends these meetings and can provide expert advice. The Council, however, only finalises its position once it has sight of the Parliament’s first reading amendments and the Commission’s resulting amended proposal. If the Parliament has not adopted any amendments to the Commission’s proposal and the Council accepts the Commission’s proposal without alteration, the act will move on for its second reading in the Parliament. Even if the Parliament has introduced amendments, if they are uncontroversial then the Council can choose to approve the amendments by qualified majority (see Diagram 2) and just as in the scenario set out above, the outcome is an early first-reading agreement. Click here to view diagram. However, not all legislative proposals have a smooth ride through the codecision procedure, especially if they have been passed by only a narrow margin in the Parliament’s plenary vote. If the Council wishes to make amends to the adopted Parliament text, two sub-options are possible and are explored more fully in Appendix 1: a second reading will only be required if the Council position is not in line with the Commission’s amended proposal, then unanimity will be required to adopt its Common Position. The Council may amend the Commission proposal only by acting unanimously (except in Conciliation). However, in order to facilitate the Council’s vote with qualified majority, the Commission often amends its original proposal just before the adoption of the Council’s Common Position.17 During the whole first reading stage, neither the Parliament nor the Council are subject to any time limit by which they much conclude their first reading. Stage 5: Communication of the Common Position The next stage is a Commission communication on the Council Common Position, which is forwarded to the Parliament in tandem with the Council Common Position, and explains why the Commission has decided to support or oppose the Council Common Position. The Commission also comments on the Council’s reaction to Parliament’s amendments which it had supported in plenary at the first reading. Informal Trialogues When the co-legislators are seeking to conclude an agreement at first reading, it is often the case that they organise informal tripartite meetings attended by representatives of the Parliament (rapporteur and, where appropriate, shadow rapporteurs), the Council (chair of the working party), and the Commission (department responsible for the dossier and the Commission’s Secretariat-General). Stage 6: Second Reading in the Parliament A three-month time limit18 is imposed for the Parliament to take action on the basis of the Council Common Position. After the three month period to allow for scrutiny, provided there have been no objections passed, the legislative act can then be then submitted directly for the signature of the Presidents and Secretaries-General of the Parliament and of the Council, and is published in the Official Journal, ending the procedure. It is likely that the “Stop-the-clock” proposal, first proposed on 20 November 2012 and passing its first Parliamentary plenary vote on 16 April 2013 will move forward without amendment and become law by July 2013. However, as demonstrated by the “Backloading” proposal, not all proposed legislation will follow stages one to five of the codecision procedure without challenge. If the Parliament suggests amendments to the Council position at first reading then the proposed legislation will move on to stages six to nine of the codecision procedure (See Diagram 1). Final Stages (stages 7 to 9): Second Reading by the Council, Commission Opinion, Conciliation Procedure and Third Reading The Council has a further three months19 to approve the Parliament’s second reading text. The adoption procedure is broadly similar to that at first reading, but with substantial restrictions on the nature of the amendments that can be tabled at second reading.20 The plenary will make its position known on the basis of the amendments included in the recommendation adopted by the parliamentary committee and any amendments tabled in plenary by political groups. The plenary will then need to adopt amendments by absolute majority.21 If the Council, voting by a qualified majority on the Parliament’s amendments (see Diagram 2), and unanimously on those which have obtained the Commission’s negative opinion, approves all of the Parliament’s amendments no later than three months after receiving them, the act is deemed adopted. In all other cases, Conciliation must be initiated, the Conciliation Committee having to be convened within six weeks.22 Conciliation is rare in practice (see Appendix 1). Distinguishing Codecision from Comitology An important distinction must be drawn between when the codecision procedure is used to create new laws, exemplified by the “Stop-the-clock” and “Backloading” proposals, and when there is delegation to the process of “comitology”. Comitology is an example of EU implementing procedure, used when legislation has already been passed by codecision but requires further amendment to be fully implemented, exemplified by the new “Registry Regulation.”23 The “comitology” procedure applies to the adoption of measures of general scope designed to apply essential provisions of basic instruments, or if specified, to adapt, delete or amend certain non-essential provisions of that basic instrument. The Comitology Regulation 24 sets out uniform conditions for the implementation of legally binding European Union acts, those acts (” basic acts “) are to confer implementing powers on the Commission. It is for the legislator, in accordance with the criteria laid down in the TFEU,25 to decide in respect of each basic act, whether to confer implementing powers on the Commission. A basic act may provide for the application of the advisory procedure or the examination procedure, taking into account the nature or the impact of the implementing act required. The new Registry Regulation is an example of the examination procedure. The latest incarnation of the Registry Regulation was put to vote in the EU Climate Change Committee (the relevant comitology committee) on 24 January 2013, and it received a majority vote in favour. It was then forwarded by the Commission to both the Council and the Parliament, which have up to three months to oppose the measure. The measure was adopted, after the three-month period lapsed, on 2 May 2013.26 Conclusion The lessons learnt by the participants in the EU ETS are mostly through hard and often painful experience. Price volatility has often been extreme and, as a commodity to invest in, allowances have often not provided a risk-worthy return. In a market created by legislation, an understanding of how the EU goes about making the laws, regulations and rules that allow the EU ETS to exist and operate is therefore key to the market’s ability to attract investment in low-carbon abatement technology, and in altering the behaviour of large emitters. As a policy measure, the concept of cap-and-trade as the best tool to achieve a price on our carbon emissions is being challenged in the EU, at a time when other countries (e.g., Australian, South Korea and Kazakhstan) and regional schemes (e.g., California and Quebec) are adopting their own cap-and-trade schemes. The EU ETS, as the oldest and largest international scheme, has an important climate leadership role to play and its trials and tribulations will be lessons to others. For risk managers, a better appreciation of the significance of the price volatility driven by EU ETS legislative and regulatory activism will enable them to do their jobs more effectively. The problem for the market is that there are no market tools to hedge against the unpredictability of the legislator, although the effectiveness of lobbying as a tool in the EU legislative process, as seen in the “Backloading” proposal, appears to be increasing. Click here to view flowchart. Continue reading
US Investors Targeting Foreign Property
US Investors Targeting Foreign Property By Francys Vallecillo | May 2, 2013 11:29 AM ET Driven by potentially high returns, U.S. investors are increasingly targeting funds that invest in foreign commercial and residential property. During the first quarter of 2013, investors put $2.6 billion into mutual and exchange-traded funds that invest in offices, hotels, and other foreign commercial properties, the largest number since the record $5.3 billion during the first quarter in 2007, Reuters reports. In 2012, Americans directly invested $38.71 billion in foreign commercial properties, an increase from the $32.8 billion the year before, according to Real Capital Analytics. “The big plus is diversification of your portfolio, number one,” New Jersey’s public pension funds chief investment officer Timothy Walsh told Reuters . “Number two, we actually think there’s better returns going forward.” Investors are also attracted by the high net operating income found overseas, Mr. Walsh added. Overall, global commercial investment is expected to increase this year . But this is a new model for many U.S. investors. “The basic assumption and belief, which is still untested, is [returns] won’t be super highly correlated with stocks and bonds in other countries,” said Joseph Gyourko, a business professor at the University of Pennsylvania specializing in real estate, told Reuters . “It’s going to be different than owning equities on the German stock exchange.” As a way for Americans to get in the foreign property game, almost 5.5 percent of 401(k) retirement funds now offer a global real estate fund as an option, up 30 percent since 2007, according to San Diego-based retirement firm Brightscope. Overall, as global markets are emerging and distressed markets are recovering, investors can benefit from increasing prices in local economies. “If you have a specific view on different countries or different regions, buying the real estate is more direct to the local economy of that country, than just stocks of companies that have a global revenue base,” WisdomTree Investments director of research Jeremy Schwartz told Reuters . Directly investing in foreign real estate can be accompanied by political and economic risks and experts warn to always use caution. “If you land a bunch of Americans and say just go out…they’re going to get slaughtered by the local guys,” chairman and chief executive of Prologis Inc Hamid Moghadam warned. ↓ Read User C Continue reading
