Last Updated: Sunday, December 06, 2009
In the last week alone, it has been at the heart of a major funding dispute with China and political chaos in Australia. But despite its growing importance, the world of carbon trading remains opaque, almost unknown by the average investor even as it becomes an enormous global industry.
At its heart, carbon trading is a simple business: Companies have caps on the amount of greenhouse-gas emissions they are allowed to make, for which they receive “credits.” If they exceed their emission caps, they can buy credits from other companies that are emitting below their caps, providing motivation for everyone to invest in greener technologies and reduce emissions.
That is where the simplicity ends. In North America and much of the rest of the world, there is no harmonized emissions-trading system, and no one really knows what that system will look like once governments take a more active role in regulating emissions (the European Union has a system, but there are plenty of questions about how effective it is.)
Even without established cap-and-trade in North America, a wide number of public- and private-sector ventures are up and running. It is proof that entrepreneurs recognize that carbon trading is the future, and everyone from Alberta farmers to U.S. alternative energy producers are benefiting.
The carbon market is growing with staggering speed.
In 2002, the World Bank estimated that 32 million metric tonnes of carbon emissions were traded around the world, worth about US$100-million. Bill Clifton, commissioner of the U.S. Commodity Futures Trading Commission, said in a recent speech that in 2008, 4.8 billion metric tonnes were traded with a total dollar value of US$126--billion.
That works out to an annual growth rate of more than 300%, and that is before the U.S. Federal government steps in with some kind of carbon program. Experts have suggested the carbon market could be worth US$2-trillion or US$3-trillion a year in short order, dwarfing even the oil market.
“Make no mistake, these carbon markets can be the world’s largest commodity markets in a few short years,” Mr. Clifton said.
For investors, the carbon-trading market offers some opportunities, but a combination of government uncertainty and the sharpest global downturn in decades makes it a dicey proposition.
Carbon prices have collapsed over the last year, especially in North America, where trading is voluntary.
Part of the reason is economics — when a recession hits, there is less industrial activity and companies emit less. The other factor is political, as many companies do not want to buy voluntary carbon credits when it is unclear how an eventual government-run system will work.
The main vehicle to buy and sell carbon credits in North America is the Chicago Climate Exchange (CCX), where prices have plummeted from more than US$7 per tonne last year to just US15¢.
The exchange still boasts a blue-chip base of large emitters, including Canadian companies such as Domtar Corp. and Potash Corp. of Saskatchewan Inc. They see the CCX as a testing ground to prepare for real regulation in the future.
In Canada, the CCX partnered with TMX Group Inc. last year to create the Montreal Climate Exchange. There was a lot of excitement about the exchange at the time, as Ottawa was talking about introducing greenhouse-gas regulations in 2010. Now that timeline is up in the air.
Léon Bitton, vice-president of research and development at the Montreal Exchange, says the market is having trouble getting traction without any guidance on government policy. But that also creates opportunity, he says, as CO2 emitters can buy carbon futures today at prices that could look very favourable once government puts a price on carbon.
“If you think there is a certainty that there will be regulation, you like to go to the marketplace when the market is at the low end of prices. So some participants are entering the market at that stage,” he says.
Since launching, the Montreal exchange has traded close to 130,000 tonnes of CO2 through futures contracts, a very modest amount. The market price was about $12 a tonne at launch. It eventually fell all the way to $2, and now is back up to about $6.
Individual investors may be moving into the market along with emitting companies, Mr. Bitton says, but he does not know who the buyers are.
While the exchange is still operating on a very small scale, there are patchwork carbon programs in North America where serious money is starting to change hands.
One of those is in Alberta, where the government-mandated carbon-trading scheme is turning into a huge win for farmers, who can produce and sell carbon offset credits just by tilling their land less. Don McCabe, a farmer and president of the Soil Conservation Council of Canada, says they have created about five million tonnes of offset credits since mid-2007. Some farmers have even sold their credits on the CCX, but Mr. McCabe acknowledged that the prices are “terrible.”
Other North American carbon-trading programs include the Western Climate Initiative (a joint effort of states and provinces that plans to launch cap-and-trade in 2012) and the Regional Greenhouse Gas Initiative (RGGI) in the U.S. Northeast.
While all of these programs have broadly similar rules, many business leaders are wary of them until politicians introduce firm legislation. And recent events suggest that they may not rush to do so.
This week, Australia’s political system was thrown into turmoil when the Senate rejected Prime Minister Kevin Rudd’s plan to introduce a cap-and-trade program ahead of the Copenhagen conference. It is a serious blow for a leader who has already reversed past government policy by signing on to the Kyoto Accord, and the debate over the issue also cost the opposition leader his job.
At the same time, a major dispute broke out between China and the United Nations over carbon credits for wind farms. The UN blocked funding for the farms over concerns that they do not need financial aid, and that China deliberately lowered subsidies to these projects in order to make them eligible for UN funding.
While these are just two isolated events, they demonstrate how complex and difficult it is for government and business leaders to implement and manage any kind of carbon-trading system.
And with carbon prices as low as they are, many experts are questioning whether existing systems are really helping. They say that companies have no -motivation to invest in cleaner technologies, as they can just buy dirt-cheap credits instead. There have even been calls in Europe for a price floor on credits.
So while everyone agrees that carbon trading represents the future, there is no consensus on when it will fully take shape, and what it will look like in its mature form.
“We are well positioned in the marketplace and are just waiting for more predictability in terms of legislation,” Mr. Bitton says.
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