Here\u2019s an interesting thought.\u00a0 As the global stock markets are sliding back in the wake of concerns over China\u2019s stock market woes, investors are looking to diversify their holdings and hedge a bit with different kinds of asset. Which is predictable.\u00a0 At times like this, investors look for the chance to buy cheap, weather the volatility and enjoy a bit of upside when it all gets back to normal. And for the more risk inclined, carbon, specifically Certified Emissions Reductions or CERs, might finally be looking like a reasonable punt.
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\nNow, admittedly, for some years now CERs have looked like a bad investment. The price of CERs has jumped back in recent months from an all time low of $0.10 (more or less) to around $0.53, but let\u2019s face it, that\u2019s not exactly a hot prospect, is it?\u00a0 In fact on the basis that they were once $30 per credit, you could consider this simply a relief rally, as in \u201cok, guys it\u2019s bad, but not quite as bad as we thought it was\u201d.<\/p>\n
But there are subtle hints in the world of international government climate discussions that things might be looking up for carbon markets. The current state of multiple regional markets and local mechanisms to reduce emissions isn\u2019t working as a global approach to reduce CO2 emissions. At the forthcoming COP21 meeting (UNFCC climate change conference) and CMP11 (the signatories to the Kyoto Protocols annual summit), both taking place in Paris this November, we\u2019re promised a global approach will be firmly on the agenda. And this global thinking might just raise the price of carbon.
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The oversupply problem: <\/strong> The problem stems from when most ETS schemes were set-up. There was an overestimation of the number of Permits to Pollute that were needed, so polluters weren\u2019t incentivised to reduce their emissions that quickly because of an oversupply of permits. Secondly, once countries began registering CERs (the most reliable ones being registered with the UNFCC via the Clean Development Mechanism or CDM) there was a chronic oversupply of those too. Which is why we saw the price of CERs plummet from $30 before the financial crisis of 2008 to $0.53 today. This was partially caused by the sudden boom in CERs coming from high growth industrial economies like China over the last decade, plus the increase in registration schemes that led to a glut of low quality CERs which were questionable in their authenticity due to variations in the measurement methodologies outside schemes like the CDM. The emissions paradox: <\/strong> However, when you look at the developing world, where low carbon technologies are hard to incentivise because governments don\u2019t have the revenues to support tax breaks and subsidies, we see emissions rising. A cap and trade scheme and a CER market also costs the economy. Put simply, in the developed world, we find governments with the ability to incentivise green investments and run schemes to reduce and offset carbon emissions, but in poor economies like Zambia and Malawi we see governments forced to adopt coal power to keep the lights on because they can\u2019t afford to attract green investments or run ETS and CER mechanisms. Which is why we see global emissions, whilst slowing, are still rising despite the fact emissions from the developed economies of the world are dropping.<\/p>\n Without a global commitment to cap-and-trade policies, and financial support for developing economies to implement them, CERs will remain oversupplied due to market size, and developing world emissions will rise faster than developed economies can cut them. A new hope for carbon futures?<\/strong> Here\u2019s an interesting thought.\u00a0 As the global stock markets are sliding back in the wake of concerns over China\u2019s stock market woes, investors are looking to diversify their holdings and hedge a bit with different kinds of asset. Which is predictable.\u00a0 At times like this, investors look for the chance to buy cheap, weather the […]<\/p>\n","protected":false},"author":1,"featured_media":3061,"comment_status":"closed","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[82,88,89,46,84,49,52,53],"class_list":["post-3060","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-uncategorized","tag-carbon-350","tag-cer","tag-ets","tag-news","tag-policy","tag-renewables","tag-subsidies","tag-tax-incentives"],"yoast_head":"\n
\nWe\u2019re all familiar with the combination of stick and carrot policy for reducing emissions in the developed world. There are about 40 countries and 20 cities, all with strong economies, that operate Emissions Trading Schemes (the stick) which normally require polluters like power stations to buy Permits to Pollute at a government set price. For example, in the EU ETS, each permit to pollute costs \u20ac8 per ton of carbon. These prices can vary wildly, they are as low as $3 in Mexico and $30 in British Columbia. The carrot is the ability within all schemes to offset carbon emissions over and above the Permits with Certified Emissions Reductions (CERs). The general idea is the number of permits issued reduces on an annual basis (in the EU this is a 1.7% reduction year on year) and there\u2019s also a maximum ratio of how many CERs you can buy to offset extra emissions (EU sets this at 10% CER : Permits to Pollute ratio). In theory, every year, carbon emissions should reduce. But in reality, the system isn\u2019t working effectively.<\/p>\n
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\nThe oversupply issues are complicated by the fact that emissions in the developed world have dropped, so the combination of CERs and ETS looked like they were working. But what was really happening in the developed world is illustrated by looking at the broader global economy as a whole. In developed economies the reductions in emissions and boom in renewable energy and low emissions vehicles (which accounts for a large proportion of the reductions) wasn\u2019t driven by the cost of carbon, it was incentivised by indirect subsidies from governments that used devices like energy auctions, feed-in-tariffs and tax breaks for green investments to drive lower carbon technologies in high polluting sectors of the economy. <\/p>\n
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\nFighting climate change is about achieving the largest emission reductions per USD spent and for this you need a precision instrument. And that\u2019s\u00a0a strong carbon price and the global adoption of emissions trading schemes. Christina Figueres has been the Executive Secretary of the United Nations Framework Convention on Climate Change (UNFCCC) since July 2010 and seen the market for carbon bumping along at rock bottom because of oversupply of CERs and lack of available markets to absorb them. So she is initiating a drive to get all signatories to the new convention on climate change to adopt ETS mechanisms, which is good news for investors.
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\nInvestors should be mindful that UN has had great success in regulating the emissions of harmful gas (Montreal and Kyoto Protocols), they\u2019ve incentivised the Eastern EU and the developing world to invest in more than 7000 environmental projects (even though there is significant doubt over Ukrainian and Russian ERU Credits – quelle surprise?).\u00a0 And whereas the Kyoto CER price is now languishing in the doldrums, the adoption of emissions trading schemes around the world will increase the market size – and market based mechanisms and global trade are effective tools to address global issues.\u00a0 Right now the price of CERs is low because of oversupply, but with a larger market, the supply:demand equation will shift in favour of the demand side, and prices are bound to rise.\u00a0 Coupled with an upward pressure to raise carbon prices (to reach emissions targets) though emissions taxes, we could very well see prices for CERs double or even quadruple over the next five years. That\u2019s a rise from $0.50 to $2.5 which might sound dramatic but $2.5 is where China\u2019s domestic certification scheme for emissions reductions has priced Chinese Certified Emissions Reductions (CCERS) now.
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\nNow that\u2019s an interesting prospect.\u00a0 Investors who buy CER futures now might very well see significant growth in the short to medium term.\u00a0 In fact, by 2050, a global price of $30 per CER might not be unrealistic.\u00a0Governments of the world are looking at the low levels of economic growth, and stock market slumps coming from the Chinese crisis and won\u2019t ignore the potential to get more money flowing through their financial sectors with a healthier carbon trading market. And let\u2019s face it, it\u2019s not like things could get any worse for carbon prices than they already are. In the big picture, carbon reductions are becoming an ever increasing threat to long term political and economic stability in many parts of the world, and so there is popular backing and political will to do something to get the private sector self-regulating its emissions. \u00a0And reinvigorating the trade in CERs is the most obvious way to do it.
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\nLooking at how major institutional investors like pension and infrastructure funds are investing in renewables now, \u00a0it\u2019s not unreasonable to think they\u2019re banking on more than just the demand for renewable power to deliver decent long term returns.\u00a0 After all, electricity prices are only part of what makes renewable energy profitable, the ability for renewables to create added value through creating and selling CERs is a key element of how they deliver long term value back to investors and perhaps will supercharge the system going forward.\u00a0\u00a0\u00a0It\u2019s an intriguing prospect…<\/p>\n","protected":false},"excerpt":{"rendered":"