• Embed Doc
  • Copy Link
  • Readcast
  • Collections
  • CommentGo Back
Download
 
 
Carbon Trading
 
The Carbon Market – The Essential Guide, Part 1
 
May 01, 2008Tim Morris,
wise-owl.com
analyst With the global carbon market bearingan estimated value of $30bn and rising,investors may be forgiven forquestioning whether the old adage that‘money doesn’t grow on trees’ stillholds true. To bring you up to speed onsuch matters, we have put together this‘essential guide’.
Fast Facts
 The global market for carboncredits has grown 24 fold since the Kyoto protocol came into effect in 2005.Europe is the heart of the global carbon market, where futures and options contractsover carbon credits are traded on dedicated ‘climate exchanges’.Carbon credit prices are driven by changes in the level of the legal emissions cap, theweather, fuel prices, and increasing market penetration as emission regulations areextended to more companies.Australia hosts the world’s second largest carbon credit market in NSW, but a nationaltrading system has yet to be established.Investment in environmentally friendly carbon offset projects, which generate carboncredits, has also grown strongly.The market will create opportunities for the renewable energy and forestry sectors,although use of forestry projects is restricted.The technical outlook for European carbon credit prices is bullish.
Background
 Unlocked following the 19th century industrial revolution, the power of carbon hasfuelled the wave of economic development which has delivered modern society’s greatestaccomplishments, such as electric lighting, the automobile, and flight. However, in thelater half of the last century we learned that these advances were not without cost, as thefirst clues began to surface about the toll which modern society’s habits were having onour planet.Unlocking the power of carbon based fuel sources releases carbon gases into the air,trapping heat within the Earth’s atmosphere, creating what we all know as the globalwarming effect. For evidence of the effect we need only consider the increasing
 
concentrations of carbon dioxide within the atmosphere. Before 1850 the Earth’satmosphere contained about 280 parts per million (ppm) of carbon dioxide, however thefigure is now 380ppm, and is forecast to reach 550ppm by 2050 according to theIntergovernmental Panel on Climate Change.The potential impacts of global warming on sea levels, the weather, and the food chainare well documented, and the message is clear. Society needs to curb its addiction tocarbon based energy to ameliorate global warming.For many years global warming remained largely ignored as purely an environmental andacademic issue. Only during the last few decades have world leaders begun toacknowledge the issue, as its potential economic, social and financial risks became moretranslucent.As world governments unite to counteract the effects of global warming, a combinationof regulatory and market based remedies are being adopted to essentially put a price onclean air. While this poses a threat to some old industries with unflattering environmentalrecords, it has spawned an entirely new industry focused on the emerging carbon market,creating opportunities for investors.
The Kyoto Protocol – Creating a Market for Carbon
 A market for carbon evolved as a direct consequence of the Kyoto Protocol, aninternational agreement signed in 1997 that became effective from 2005. The treatyrequires developed countries, referred to as ‘Annex I’ nations, to reduce their greenhousegas emissions by 5.2% over 1990 levels by 2012. Developing countries that have ratifiedthe agreement are not required to do so.Discussions about greenhouse gas emissions often focus on carbon dioxide (CO2), whichis the most common, but not the only gaseous villain in the battle against global warming.In addition to CO2, the Kyoto Protocol also targets reductions of five other dangerousgases, which have even greater ‘global warming potential’. However to avoid confusion
 
and provide an ‘industry standard’, all greenhouse gas emissions are referred to in termsof CO2 equivalents. With CO2 being the industry’s reference point and four of the sixgreenhouse gases targeted by Kyoto containing carbon, it is no surprise to see thisevolving field coined the ‘carbon market’.
Kyoto Compliance
 Rather than simply placing a blanket ban on greenhouse gas emissions beyond a certainthreshold, the Kyoto agreement recognises the need for a flexible approach for achievingemission reductions, offering 3 ways for governments and corporates to achievecompliance.1. Direct emission reductions This involves a company or government altering theirexisting activities to directly reduce their emissions. A simple example would beswitching off the office lights overnight.2. Invest in Emission Offset Projects In circumstances when it is not feasible to directlyreduce one’s own emissions enough to meet legal requirements, companies andgovernments are able to invest in separate projects that remove carbon from theatmosphere, to essentially offset their own activities.3. Financial ComplianceBy either paying a penalty for emissions beyond the legal limit, or through buying carboncredits, which are emerging financial instruments that permit the holder to emit beyondtheir legal limit.
The Carbon Market
 
of 00

Leave a Comment

You must be to leave a comment.
Submit
Characters: ...
You must be to leave a comment.
Submit
Characters: ...