With CO2 emissions being recognised as the leading cause of climate change the international community has made this the main target of their efforts by introducing the carbon trading system as part of the Kyoto Protocol.
The idea of global warming and climate change is no longer controversial. Not only do the figures stack up. Not only is scientific consensus close to unanimous. But most of us will agree that the weather is changing. Freak weather is becoming less freak and more ‘everyday’. Governments realise this too and, with an eye to the future upheaval and cost, have implemented measures to try and slow the pace of climate change.
McLaren Formula One Racing Team buys carbon credits June 2012. They are the first carbon neutral F1 team so far.
UBS forecast 195% market increase to the end of 2013.
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What is carbon trading?
Carbon trading is a trading system for countries, companies and individuals that is designed to offset carbon emissions produced from one activity with another. So for example, if one company emits less carbon than their emission target, they may sell credits for that surplus to a company that produces carbon emissions that surpass their target. Emissions trading refers to the same principle except that it covers all emissions (greenhouse gasses and other pollutants) whereas carbon trading refers only to carbon dioxide (CO2) emissions.
By allowing market forces to govern emissions, there is a real economic incentive for industry to use cleaner technologies and methodologies. Projects that emit less than their carbon cap are rewarded whilst those that exceed it must pay to do so.
There are essentially two different types of carbon credit. Certified Emission Reduction (CER) and Clean Development Mechanism (CDM) are compliance credits, i.e., credits that are compulsory under the carbon trading scheme. VERs are Voluntary Emission Reduction credits. For the would-be investor the most important difference is that only CERs can be banked and carried over to future phases of the scheme.
Why buy carbon credits?
Many carbon credits are bought for ethical reasons. Individuals and households who are becoming increasingly aware of the consequences of climate change can buy carbon credits to offset their carbon footprint. A flight from London to San Francisco return would require approximately £20 of carbon credits to make it a carbon neutral trip. Ethically minded businesses can also us the VER style carbon credits in trading. Of course companies that do go the extra mile and purchase VER carbon credits do so not just for the environment but so their company looks good in the eyes of their consumers, it is a form of marketing. There are further benefits in public relations, with consumers often demanding sustainably produced goods and services.
Carbon credits may also be traded as investments
Investors should remember however that unlike commodities that represent something tangible, carbon credits just represent a permission to emit a certain amount of greenhouse gasses. The existence of carbon credits depends on national compliance with allocated emission caps. If governments withdrew from the scheme tomorrow the market would collapse. However, the carbon trading market is currently worth an estimated $30billion and is forecast to grow. This is of interest to potential investors whether they are in industry or not. And with the prospect of continued international compliance there is a thriving and expanding market in carbon credits.
How is the big market?
According to a recent report published by Ecosystem Marketplace and Bloomberg New Energy Finance, and despite the closure of the Chicago Climate Exchange in 2010, the carbon market still managed a 34% increase in trading volume to record 131 million tons of carbon dioxide worth approximately $424 million £270 million.
In previous years the USA has been one of the largest buyers and sellers of carbon credits with around one third of the market. However in more recent years the Latin American market, ecologically responsible companies, investors and individuals have increased their share of the market substantially.
Latin America has been benefitting from Reduced Emissions from Deforestation and Degradation (REDD) carbon credits for sale through projects that have saved endangered rainforest which increases the carbon captured in trees. Latin America is at the forefront of the REDD type of carbon trading.
How do I buy carbon credits?
There are a variety of credit suppliers on the voluntary carbon market. They can be split into four main categories:
- Wholesalers – Wholesalers generate a portfolio of carbon credits and sell them in large quantities to industry and financial establishments;
- Retailers – Retailers sell credits in small quantities to businesses, NGOs and individuals;
- Carbon Offset Projects – Carbon Offset Project developers create emission reduction projects which earn them carbon credits. These are then sold on to end customers;
- Brokers – Brokers never own carbon credits but act as middle-men, facilitating the trade in credits between all of the above.
With such a complicated mechanism as the carbon trading scheme investors, particularly the individual investor, can sometimes feel a bit lost and overwhelmed, but still want to be a part of it. If this is the case maybe a carbon trading fund is the answer for you. By investing in a fund you will be able to spread your investment over many projects rather than putting all your eggs in one basket. You will also be able to benefit from the knowledge of experienced investors in the field. If you do decide to invest in a fund you should make sure that it is SIPP approved carbon trading and can provide a solid track record and a clearly defined exit strategy.
As with all investments, and maybe even more so, it is essential to do your research if you are thinking of investing in a carbon trading scheme. Read up and understand the market. Find a reputable supplier with a proven track record. Research how prices have changed over time and what the predictions are for the future. We think that with the world population currently at 7 billion and steadily increasing, plus a growing middle class in India, China and Latin America with the addition of climate conscious buyers and companies, the demand for carbon credits is looking good.
Alert: We noted on 3 October 2011 that 23 farmers in Honduras appear to have been murdered in a dispute with the owners of UN-accredited palm oil plantations which has questioned the integrity of the EU’s Emission Trading Scheme (ETS) as the carbon credits from these farms remain on sale. Full story.
As stated in our forestry investment article, be aware of which country and even where within that country your investment is actually being carried out. Countries such as Honduras are not known to be as stable and as closely aligned to the set of beliefs held by most westerns, even when compared to a close neighbour such as Costa Rica.
- Carbon offsetting, carbon trading
- Emissions trading
- Feed-in tariff (FIT)
- Green oil investment
- Renewable energy investment
- Solar investments
Carbon trading is one green investment which allows you to control your own financial future with an eye on a better future for the next generations. We also discuss the value of ethical investments such as timber, bamboo and teak.
Invest in Carbon Trading
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