Carbon Credits Investments

Nov 26, 2013: These days one of the new buzz words in investment circles is carbon trading or carbon investments. Large investment banks like Goldman Sachs, Barclays Capital, JP Morgan and Morgan Stanley have already invested in carbon trading by creating carbon trading departments in their companies.

Since this is a relatively new investing field, we need some basic understanding of the components of this game. So let's explore :).

What is a Carbon Credit?

Any tradable certificate or permit representing the right to emit one tonne of carbon dioxide or the mass of another greenhouse gas with a carbon dioxide equivalent (tCO2e) equivalent to one tonne of carbon dioxide is termed as a carbon credit. To reduce the concentrations in greenhouse gases (GHGs), national and international environmental control committees designed carbon credits and carbon markets. This mechanism took a formal birth in the Kyoto Protocol, an international agreement between more than 170 countries. The components comprising the carbon market were agreed through the subsequent Marrakesh Accords.

The objective is to allow market mechanisms to drive industrial and commercial processes towards low emissions or less carbon intensive approaches than those used now. As GHG mitigation projects generate credits, this method will help to finance carbon reduction schemes between trading partners globally.

How does it work?

There are several companies that sell carbon credits to commercial and individual customers who are voluntarily interested in lowering their carbon footprint. Usually you can purchase carbon credits from an investment fund or a carbon development company that has aggregated the credits from individual projects. There is also an exchange platform, Carbon Trade Exchange, for trading carbon credits.

The validation process and sophistication of the fund or development company that sponsored the carbon project determines the quality of the carbon credits. The quality in turn determines the price of the credit. Usually carbon credits sold through the rigorously validated Clean Development Mechanism (CDM) are more valuable than voluntary units.

Are there any Emission Markets for the Carbon Commodity?

At present, six exchanges trading in carbon allowances globally. They are the following:
  • Chicago Climate Exchange
  • European Climate Exchange
  • NASDAQ OMX Commodities Europe
  • PowerNext
  • Commodity Exchange Bratislava
  • European Energy Exchange
Numerous companies engage in emissions abatement, offsetting, and sequestration programs to generate credits that can be sold on one of the above exchanges. There is one private electronic market, CantorCO2e, which was established in 2008. Commodity Exchange Bratislava trades carbon credits using a special platform named Carbon Place. NASDAQ OMX Commodities Europe trades offsets by Certified Emission Reductions (CERs) which is a CDM carbon project.

Return on Investment for Carbon Credits?

Currently, one of the fastest growing segments in the financial sector is managing emissions. In 2007, the market was estimated to be worth about €30 billion in the City of London. Louis Redshaw, head of environmental markets at Barclays Capital predicts:
Carbon will be the world's biggest commodity market, and it could become the world's biggest market overall.
Barclays has also predicted rises in carbon credit prices up to 42% by 2012. Several major financial institutions such as Merrill Lynch, Goldman Sachs, Citi Group and JP Morgan have begun to trade carbon credits.

What is your take on Carbon Credit Investments? Please leave a comment :).

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