Who exactly is investing in carbon? Companies which are part of compliance regimes invest in carbon credits, or future options, hedging against current prices. Companies which expect to be part of a compliance regime in the future also sometimes invest in carbon credits, hoping to gain a future financial advantage by investing now.
Other parties investing in carbon credits are financial institutions and investment banks as well as private investors.
A Developing Market
A World Bank Report on Carbon Credit markets states that they:
…witnessed a growing presence of funds, energy-trading firms, and increasingly sophisticated utilities and industrials that used the options market for hedging (both volumes and prices) and profit-making transactions. The bulk of activity now comes from volatility and other relative value trades rather than asset-backed trades (i.e., financial and technical trades now account for a greater portion of market activity than do trades for compliance purposes).
This report can interpreted positively or negatively depending upon one’s point of view. On the one hand the argument has been put that a large part of carbon markets’ growth is not due to the primary function of industry reducing carbon emissions. Instead, trading takes place to make speculative profits, or to “hedge” the risks that large energy companies face in relation to changing fossil fuel prices and currency fluctuations. In other words, it is now operating like any other financial market. However, the intention of the system was always to provide a financial incentive to stimulate emissions reduction.
As of February 2011 EUAs are sitting at 15.38 EUR and Citigroup analysts forecast €20 EUA prices at the start of phase three in 2012, rising to €25 by 2015.
CERs are currently at 11.77 EUR
VERs currently trade at anything between 2 USD and 6.5 USD for credits from more prestigious Gold Standard projects. This is a market that is expected to show huge increases in coming years but currently the value and resale potential of such credits is strongly linked to the accreditation and recognition of the particular project.
Where are Carbon Credits Traded?
When investing in a project, you will often have the option for the original broker to facilitate the resale of the acquired credits, usually as part of a larger wholesale deal. Investment takes two main forms. The first is the purchase of credits which are already in existence and registered and the second in a project, essentially investing in a project against the receipt of future credits produced. The fundamental difference between both approaches is clearly the profit to risk ratio, although in the latter case this risk can be minimized by carefully choosing the right project through a trusted advisor who has carried out the necessary due diligence.
Registries provide a host of market services, including tracking credit sales and ownership, increasing market efficiency through information sharing, and protecting against “double counting.”
Registries are typically classified into two categories: emissions tracking registries, which track buyer entities’ emissions and reductions, and carbon credit accounting registries, which report on transactions of credits, allowances and offsets.
2007 saw the premier of several new project registries, and at least several more are in the pipeline.
The most utilized registries in 2007 were the CCX, CDM/JI, and TUV SUD and the Blue Registry.