Carbon Funds Eye US Market, Risks too
Author: Chris Wills
Reasons abound for surging interest in carbon markets -- a shift of power in the US Congress, ratcheting ambition to curb emissions in Europe, and around the world stronger evidence than ever on the global warming threat.
Carbon trading under the Kyoto Protocol, worth US$3 billion last year, allows rich countries to buy permits called carbon credits to emit greenhouse gases from poor nations, and is attracting investors eyeing fat margins.
London-listed Climate Exchange PLC owns both US and European carbon exchanges and its share price has more than doubled in six weeks.
"Other than increased investor interest in both the exchange and carbon related sectors, the company is not aware of any reason for this rise," it said late on Wednesday.
Carbon funds hunt projects in developing countries where they can fund emissions cuts, getting in exchange carbon credits called Certified Emission Reductions (CERs), which they can sell on to countries facing targets under Kyoto.
That business is seen getting more risky.
"I think the success rate of signed projects will probably edge down from around 82 percent to 75 percent in terms of the number of credits produced compared to what was targeted," said Simon Shaw, Managing Director of EEA Fund Management, which runs London-listed Trading Emissions PLC.
CER demand is unsure, depending on how far countries lag their Kyoto targets, and also on potential demand from the United States, where a federal carbon market suddenly seems possible despite opposition from President George W. Bush.
US Democratic senators have wrested control of key committees from Republicans following elections last year, building optimism such a market can be set up by 2010.
Although the United States does not face a Kyoto target, a carbon market there would allow cities and corporates to snap up CERs to offset their emissions.
Much of the global success of carbon markets rests on netting the United States, said Econergy Senior Vice President of carbon trading, Mike Ashford.
"US banks are hiring to play a prospective US market. You'd need to be blind not to prepare yourself for that," said Laurent Segalen at the European Carbon Fund.
Other CER price uncertainties include the weather, which impacts power demand and carbon emissions, and economic growth: if Chinese growth sagged then their output would sag and their ability to generate CERs by curbing emissions would fall.
Finally, the Kyoto process grinds to a halt in 2012, and with no deal to extend it the effort of hunting carbon credits will soon not be worthwhile.
"If there's no decision by 2009 then CDM will dry up," said Segalen. "It's dangerous times. Last year it was so easy to raise funds."
London-listed Trading Emissions expects to sell its credits, which were trading at some 12 euros (US$15.58) per tonne on Thursday, at 14-15 euros between now and 2012.
EcoSecurities, another AIM-listed firm which has 353 carbon cutting projects, expects to buy the credits at between 5 euros and 9 euros and sell between 12 and 17 euros over the next five years, according to Chief Financial Officer Jack MacDonald.
"Two years ago we were buying at below 5 euros and selling at slightly above and we were quite happy with that ... if the market moves down both costs as well as selling price move down and we will still have opportunity for good margins," he said.