The European Trading Scheme has created a market worth more than €6bn, but only accurate emissions monitoring and tough industry quotas can sustain its long-term success. By ELIZABETH JEFFRIES 
Sir Nicholas Stern's report on the economics of global warming, published last October, encouraged those who believe that the only effective way to reduce global CO2 emissions is by pricing carbon to reflect its full social and environmental cost. This then allows the setting-up of a global trading scheme to allow companies and countries to trade emissions rights with one another. Such a scheme theoretically penalises heavy emitters, encouraging investment in more efficient technology, and rewards those who emit little or no carbon. Stern's report also suggested that the global community needs to spend 1% of GDP, approximately €500bn a year, now to avoid having to spend as much as 20% by 2050 if nothing has been done to lower CO2 emissions.
The framework for carbon emission limits and trading has existed since the original discussion of the Kyoto protocol and was then made mandatory in the EU on 1 January, 2005. The resulting European Trading Scheme (ETS), which came into existence by the end of 2006, created a carbon market worth over €6bn. However, the ride for investors has not been smooth. In order to avoid an outcry from industry, national governments issued too many permits to cover the first two years of the scheme. When this came to light in April 2006 the price of carbon collapsed by two-thirds. The shock revealed in the starkest terms the dependence of the carbon market on a regulated demand, the price of carbon depending completely on the scarcity of permits.
Many commentators agree with Stern, with the minds behind the Kyoto Protocol and with the EU attempt to create a carbon market. What they want now is longer-term security beyond the end of the current ETS in 2012, and ideally a globalisation of the scheme to include all nations. Since this has not yet happened, the ETS is not really taking off as it should. Given the wealth of expertise in this field in creating innovative financial mechanisms, there is no shortage of routes to invest. These include carbon funds themselves, run by either public or private-sector organisations, such as the European Investment bank's Multilateral Carbon Credit Fund (MCCF); funds run by Climate Change Capital, a specialist investment bank; or Trading Emissions PLC's TEP fund. Pension and ethical funds are another route. There is no shortage of investors wishing to invest for speculative exposure, in addition to those affected through regulatory compliance.
"A lot of this is conceptual, investing in businesses and projects that have not really been created yet. It's early stages in terms of trading records and you can't look at long-term performance," says Mark Campanale, fund manager at ethical fund company Henderson Global Investment.
There is a disparity currently between the overall capitalisation of the carbon market and the amounts actually invested in projects worldwide. Trading Emissions' fund is a case in point. The fund will invest both in the carbon market itself by purchasing carbon credits and directly in emissions reductions projects worldwide, for example, methane reduction or industrial gas destruction. These will deliver returns when they start producing energy, as well as leveraging carbon credits that can be sold. The company estimates that the €223m it initially raised in one share issue in spring 2005 was fully invested by the end of 2006, though this figure falls well short of the total sum the company has at its disposal.  |
|