Carbon Credits – The New Commodity on the Block

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Carbon-investments.co.uk is an informational portal bringing news, analysis and commentary on the carbon trading market. Speaking at the launch event held in Notting Hill’s Electric House, Business Development Manager John Adam outlined the carbon trading market’s current status and the role the new portal will play within the industry.

A market which Barclays have said will be ‘the world’s biggest commodity market’, is worth keeping an eye on.

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Carbon-investments.co.uk is an informational portal bringing news, analysis and commentary on the carbon trading market. Speaking at the launch event held in Notting Hill’s Electric House, Business Development Manager John Adam outlined the carbon trading market’s current status and the role the new portal will play within the industry.

The carbon credit market begins to mature as the major banks establish trading structures.

Carbon credits, in their various forms, have been around for some time now. The commodity, established by the Kyoto Protocol of 1997, has been traded for a number of years now on several exchanges.

Like other commodity markets, the “global” carbon market is in fact a series of smaller, differentiated trading platforms and products

The EU Emissions Trading Scheme, active since 2005, is the most established platform, and is based on compliance structures enforced upon industry based within the EU. Industries considered to be polluters are obliged to offset their carbon emmissions above a certain level by purchasing EU ETS carbon credits.

They also have an allowed quota of CER carbon credits which they can substitute EU ETS credits for. This varies from country to country, at the discretion of the national regulatory authority. As CERs are generally traded at around 2 EUR less than ERUs, companies under the EU compliance system tend to trade or buy CERs to the maximum extent their quota allows.

The third type of carbon credit is the VER – verified (or voluntary) emissions reduction. These are credits traded outwith the compliance structures, predominantly bought by companies as part of their corporate social responsibility strategy, but also by individuals who would like to offset their personal carbon footprint for personal reasons.

The majority of the major international airlines and travel agencies, such as BA, Emirates and Thomas Cook, offer travelers the option of purchasing VERs as a modest add-on to their ticket price, offsetting the journey’s carbon footprint. A number of rail travel companies, an example being eastcoast.co.uk, are also beginning to provide this option.

Companies such as General Electric make significant purchases of VER credits annually, despite not being obliged to by compliance structures, as part of their CSR policy.

Mr Adam proceeded to highlight some of the issues which to a greater and lesser extent have effected the industry over the past couple of years:

Gaining a foothold despite teething problems:

The economic turbulence of the past few years, so early in the life of this new commodity market, has meant that perhaps development in establishing itself has been somewhat slower than might have been expected. However, nonetheless the market has grown by roughly 60% year on year since 2005. According to Point Carbon, a Thomson Reuters owned company, figures released by the World Bank, the global carbon market was worth £100 billion in 2009. Over six billion European Union Allowances were traded on EU ETS in 2009 compared to three billion on 2008.

The market’s consolidation has not however been without issues. After initial erratic fluctuation in the prices of ERUs and CERs, market prices have stabilised, perhaps to an undesirable level. ERUs have been trading for around 15 EUR for 18 months now. This has been the result of uncertainty over regulatory issues and a couple of high profile scandals, such as a major security breach at the beginning of 2011 when several million euros worth of credits were stolen from registries by cyber criminals hacking into the systems.

Despite these issues and the fact that the US has yet to commit to the system, according to Bloomberg New Energy Finance, growth for 2011 is predicted at 15%, which suggests the market’s positive trajectory is intact. The stellar growth of the markets first years has passed but there are many positives to indicate a new period of steady growth.

Enter the Big Guns:
The past couple of years has seen the major global financial institutions accept the commodity and enter the market, establishing carbon credit trading departments. Perhaps the most significant recent development has been the acquisition of the major industry players in project development, retail and trading of carbon credits. JP Morgan has acquired EcoSecurities and Barclays, Tricorona – the Swedish carbon trading company, with the aim of establishing itself as “a leading global origination and trading house".

Société Génerale have set up a joint venture with Rhodia, a worldwide leader in the chemical industry, establishing Orbeo, which has a 6% share of the EU carbon trading market.

Merrill Lynch have also begun building their own portfolios of carbon credit projects and products to offer directly to their clients and Lloyd’s insurer Kiln has underwritten the first insurance product designed to cover carbon credit eligibility risk.

The future of carbon trading:
The entry into the market of these major players means that despite the fact carbon credits and their trading platforms, are very much still in the early phase, they believe the commodity has a future and is not going anywhere. It also means that the resources and trading platforms available to the industry have shown marked improvement and will continue to do so.

Many interest groups believe that despite the positives, the current trading value of one carbon credit, the equivalent of one metric ton of Co2 emissions, is too low and does not do enough to discourage industry to reduce emissions. Despite the determination to allow market forces to set the price of carbon credits, there is a growing voice to set a floor price, which would be considerably higher than the current 15 EUR level. Price Waterhouse Cooper and the British coalition government have both called for such an move as important to supporting the fledgling market by creating the stability required to drive big investment from private industry.

This discussion is set to be the main stimulus to the market in the next year or two as speculation that a floor of 30-50 EUR may be set, encourages traders to hedge carbon credits purchased at current levels.

However developments play out over the next few years, one thing is for, certain; a market which Barclays have said will be ‘the world’s biggest commodity market’, is worth keeping an eye on.

Carbon-Investments.co.uk’s role as an accessible information portal.

Mr Adam went on the discuss the team behind the portal’s vision for its role within the carbon trading market and its future development.

There is not a lot of accessible quality information available online with regards to the carbon trading market. We want to be a one-stop-shop where those interested in learning about how the market works, the different products available and the latest market trends and developments, can find clearly written and explanatory resources.

In the future we also plan to develop a platform where project owners and traders in carbon credit products can interact with potential buyers. Projects will be listed and a forum will offer the opportunity of interested investors to objectively discuss the merits of listed projects as well as share experience and knowledge.

All in all, the aim is to demystify carbon credit trading and products, and offer interested parties a platform through which to present projects and to have them open to discussion amongst potential investors.

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John Adam
Carbon Investments
+44 (0) 800 098 8745
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