iNVEZZ on Steering Clear of Carbon Investment Schemes

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Investors’ portal iNVEZZ has recently published an analysis by Tsveta Zikolova which takes a look at carbon credits and the reasons why they are not a retail investment product.



The market however remains illiquid with buyers not always available.

Tsveta Zikolova begins her analysis by pointing out that the United Nations’ Clean Development Mechanism, one of the Kyoto Protocol’s fundamental instruments, has essentially collapsed. This inevitably leads to the question whether trading with carbon credits still makes any sense for investors.

The iNVEZZ piece explains that a carbon credit is a financial instrument representing one metric tonne of CO2 or its equivalent in another greenhouse gas. The instrument was introduced in 1997 as a way to commoditise carbon emissions and create a financial incentive for companies and nations to reduce their greenhouse gas emissions. Zikolova writes that the carbon market is in a grim state with prices falling by more than 70 percent in the past year alone due to modest mitigation targets set by authorities.

The author of the iNVEZZ piece explains that there are a number of emissions trading initiatives, including New Zealand’s Emissions Trading Scheme, the EU Emission Trading System and Australia’s cap-and-trade scheme. In addition to these compliance regimes there are also voluntary carbon markets where investors are presented with different carbon investment opportunities. Zikolova argues that some buyers join carbon investment schemes “in anticipation of a future mandatory carbon offsetting regime, when they will be able to either retire the credits or sell them to others required to comply, at a profit.” The analysis provides evidence from the World Bank showing that in 2011 activity in the voluntary carbon market stabilised to a contracted 79 million tonnes for immediate or future delivery. The market however remains illiquid with buyers not always available.

Coming to the point of the analysis, Zikolova counsels private investors to consider the fact that in recent history the prices of carbon credits have been going only down. Carbon investment is also problematic because of its low liquidity – at present there is no clear and cost effective solution for an individual investor to trade carbon credits in small amounts online analogously with trade in other commodities such as gold and oil. There is also the possibility of unscrupulous marketing companies understating the risks associated with a carbon investment in order to close a sale.

Zikolova concludes that the lack of a clear and liquid trade mechanism for carbon credits and the ever-declining prices in the market make carbon investments a risky venture not appropriate for the retail investor.

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John Adam
iNVEZZ Limited
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