How To Profit From Carbon Credit Trading

How To P From Trading Carbon

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100 global businesses are direct members including Barclays, BP, Newedge, E.ON UK, Fortis, Goldman Sachs, Morgan Stanley and Shell, in addition to several thousand traders around the world with access via clearing members.

As well as the ECX, the European Union Emissions Trading Scheme (EU ETS) is the largest multi-national emissions trading scheme in the world, and a major pillar of EU climate policy. The EU ETS is a scheme which monitors European company’s carbon emissions, and creates a market for them to buy and sell credits to meet emissions targets.

And it’s not just in Europe. The US is actively setting up its own trading scheme, the US ETS, to create a more e cient marketplace

The task of helping the environment is now big business. Carbon credits are being traded all around the world by companies to meet environmental emissions targets, individuals looking to decrease their personal emissions, and investors looking to pro t from the carbon market boom whilst helping the environment.

According to the latest report from the World Bank, the global carbon trading market is now worth a phenomenal US$144 billion, up 6% from 2008 despite the global downturn. Marketplaces such as the European Climate Exchange (ECX) have seen trading volumes soar, with 2009 seeing an 82% increase year-on-year, surpassing 5 billion tones of CO2e equivalent to €68 billion. Over

for growth, and there is already the Chicago Climate Exchange (CCX), which trades voluntary credits from 400 members including Ford, DuPont and Motorola, driving global growth further.

The carbon credit trading system is often seen as a way of investing in something that helps the environment as well as generating a pro t. Each carbon credit bought puts money into a project that is ve ed to reduce greenhouse gas emissions, and can then be sold to companies who need to reduce emissions to comply with global targets, or to individuals who want to reduce their emissions. But what are carbon credits exactly? Who buys them? And how can investors pro t?

Introduction

Number of projects entering the CDM pipeline

Jan 2005

4.93%

Source: unEP Risoe and World Bank

Jan 2004 Jan 2007Jan 2006 Jan 2009Jan 2008 Jan 2010

140

105

70

35

0

Number of days


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What are carbon credits?

Each carbon credit is equivalent

to one tonne of CO 2

CERsReductions (CERs) were

created under the Kyoto Protocol’s Clean Development Mechanism (CDM) to allow industrialised countries to invest in emission reducing projects in developing nations. The CDM projects generate CERs, credits which can

S. Once a CER has been issued it carries the same compliance value as an EUA.

CER credits are highly regulated and must meet

the Kyoto Protocol. The emissions reductions must be real, measurable, permanent, additional to what is already being done, and independently

EUAsThese are the emission allowances given to participants in the EU ETS and are traded in a secondary market on the European Climate Exchange (ECX). One EUA gives the holder the right to emit one tonne of CO2. Approximately 2.3bn EUAs have been issued annually to industries covered under the EU ETS.

The opportunity to trade carbon credits was created by the United Nations’ Kyoto Protocol, a legally binding document committing countries

(GHGs).

The treaty created a number of emission reduction targets that nations needed to meet to safeguard the environment. Collectively, industrial nations agreed to reduce their GHGs by 5.2% from 1990 levels. On an individual country basis, this ranges from an 8% reduction in the European Union to 6% for Japan, 0% for Russia, and an increase permitted of 8% for Australia and 10% for Iceland. These countries are now responsible for ensuring that companies, and the governments themselves, are reducing GHGs.

To facilitate this, the Kyoto Protocol gave GHGs a value, known as a carbon credit. Each carbon credit is equivalent to one tonne of CO2. If a company has emissions over its allowance, then this entails a cost. Conversely, companies able to stay under this allowance receive credits which can be traded on exchanges for their value. Thirdly, projects in developing countries which actively reduce GHG emissions become eligible for these carbon credits, and by selling on an exchange can raise funds.

VERs

third party, but without the costs associated with CERs, which are a type of carbon credit subject to much more stringent regulation, pushing up the price. This means that individuals and companies can reduce their emissions in a more

y. Despite there being less regulation, VERs are still subject to a standard, and emissions reductions must be real, measurable, permanent, additional to what is

VERs trade over the counter and on some exchanges such as the Chicago Climate Exchange (CCX). This is giving structure to the market, and helping it grow.

The VER market is growing. In 2008, 123.4 million metric tones of CO2 were transacted, a near doubling of the 2007 volume. VER prices then increased by 20% in 2009, and the market was valued at US$705 million, with annual growth of 15% projected. General market opinion is that the wider scope of the voluntary market, and growth led by the private sector, not public policy, means that it has a strong potential to outstrip the mature market size of the compliance regime.

By the end of 2013, the total value transacted in the carbon markets is projected to reach US$669 billion, making it one of the biggest growth stories in investment (Carbon Emissions Trading Markets Worldwide, 2010).

CDM Project Distribution by Type (%)

Renewable energy sources

Capture of fugitive emission

Waste handling and disposal

Manufacturing

Agriculture

Chemical industries

62.61%

17.00%

4.93%

4.54%

4.82%

2.39%

Transport (0.11%)Mining (0.96%)Metal production (0.29%)Af/Re-forestation (0.54%)Energy demand (0.96%)

Source: United Nations Framework Convention on Climate Change, 2010


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Gold Standard and VCS

markets established by the Kyoto Protocol as well

by the Gold Standard Forganization that has trademarked the Gold Standard Label, which is today internationally-recognised as the leading indicator of quality in carbon markets.

Supporters of the Gold Standard are committed to promoting sustainable development through

by transparency and equality of access for all market participants. It was designed to ensure that emissions reductions that back up carbon

the project activities make a measurable impact on sustainable and social development in local communities.

The Gold Standard logo is a trademarked brand that represents premium quality in the carbon market.



Jan 2010

EUA average prices (US$)

Mar 2008

4.93%

Source: World Bank

Jan 2008 Jul 2008May 2008 Nov 2008Sep 2008 Jan 2009Jan 2009 May 2009Mar 2009 Jul 2009 Nov 2009

45

30

15

0


5

Who’s buying credits?in Europe, followed by a Polish energy group. Overall, European groups are spending £800 million on carbon credits.

Last year, Spain announced that in order to Kyoto Protocol, it would be purchasing

6 million tonnes of carbon credits, and is calculating that it will need to spend €1.2 billion overall to comply. Most countries are spending similar amounts or more. And in the voluntary and over the counter (OTC) markets 94 million tonnes of CO2 were traded last year, with market participants predicting that over 1 billion tonnes per annum will be traded by 2020.

The potential market for carbon credits is huge. Under the Kyoto Protocol, not just companies but

Even outside of the agreement, many companies are buying up credits to help their corporate image and to encourage their customers to go green.

ability to purchase credits for a number of years Westin resort and Spa

y, and have reduced 800 tonnes of CO2 to date. The Swedish energy group Vattenfall is the largest single buyer of credits

The prices of the credits themselves vary and can be volatile, creating the potential for large gains as demand grows.

As of the 30th September 2010, CER spot prices were €13.56 and EUA spot prices €15.60 as traded through the exchanges. Running alongside this are the OTC markets, where one of the largest companies charge £15.49 per credit, ranging to £10.90 for each credit from another supplier. British Airways charge

This is where investors come in.

(also known as the spread) of OTC credits bought from a company which either gets them from an exchange or direct from a project can

ensuring that the investors money is going into emissions reducing projects worldwide. This form

the communities where the projects are located, r.

Through some credit trading companies, they are available from as little as €5, creating the

trading company which preferably has access to BlueNext, the world’s leading trading exchange for credits. Tand high quality, which increases credit value, buy only gold standard or VCS (Voluntary Carbon Standard) credits.

The carbon market continues to grow, and continues to provide further opportunities to




Please remember that all investments carry risk. Whilst we undertake all due diligence and research to present accurate scenarios and investment opportunities, the information presented is based on today’s market value and predicted growth rates and as such cannot be guaranteed.

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How To Profit From Carbon Credit Trading