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Carbon drivers

Lee Jones finds out about opportunities in the booming sector of carbon trading which has the growing impetus of support from governments around the globe

World leaders are meeting in Copenhagen this week to discuss cutting its carbon emissions. Many expect development in the carbon trading markets to take centre stage but is there money to be made in investing in carbon reduction?

Carbon trading on a national level works by governments setting an overall limit for carbon emissions and issuing permits to companies that allow carbon emissions up to the total limit.

Companies that exceed their quotas can buy unused allowances from companies that have not used their full entitlement. This can also be a cross-border exercise, with richer countries buying more carbon permits from developing nations who have not filled their quota.

Climate Exchange, a derivatives trading platform for carbon credits, says many more international firms are becoming interested in carbon dealing. It hopes the Copenhagen summit can flesh out nations’ pledges and help create a more profitable industry.

According to Point Carbon, the global carbon market was worth more than £83bn in 2008, up from £36bn in 2007.

Is it right for retail investors? Carbon trading is a global exercise and Climate Exchange admits it is not the most acces-sible market for retail investors. WHEB Sustainable Fund co-manager Nicola Donnelly says carbon trading is a high- risk, single-bet exercise.

She says: “The price of carbon could be anywhere within a very large range and there is a lot of uncertainty. Investment banks often trade carbon credits and that speaks volumes. Playing it more indirectly is where I think retail investors should be.”

Playing indirectly means finding firms or funds that invest in the carbon-reducing technology instead. Recent reports in the US suggest that former vice-president and green campaigner Al Gore may become the first carbon billionaire after investing in renewable energy firms and carbon-reduction firms he has advocated.

Low Carbon Investment chief investment officer Steve Mahon thinks investing in the right areas of the carbon industry has potential. He says trading is very volatile but points to investing in the products or firms that generate clean energy or save energy while generating carbon credits that can be traded.

He says: “You should not be solely dependent on the carbon markets, just a beneficiary of them. If you look at the underlying drivers of the carbon market, ultimately, you see that the governments of the world are heavily supportive of the introduction of low-carbon solutions.”

Mahon says even during the recession, the low-carbon firms have prospered and he says some firms in his portfolio have grown by between 50 and 200 per cent.

Donnelly says retail investors should be looking at companies that are benefiting from carbon cuts and more efficient use of energy. “We all know legislation the world over is only going in one direction and that is cutting emissions. Countries such as China are saying climate change is the best investment opportunity in a generation.”

Mahon says: “It is a danger to get too caught up in the outcome of the summit. It is more important that countries implement their own emission pledges. For example, in the UK, we have new feed-in tariffs in 2010, whereby if you generate renewable energy from small-scale renewables, you get a 20-year guaranteed price for that energy. That is going to revolutionise the UK market for small-scale renewables, regardless of Copenhagen.”

Donnelly also says there are real investment opportunities available: “There are announcements every day about new green stimulus packages and big numbers are being thrown about. These small companies are rushing round to position themselves to benefit from the new opportunities.
“In 10 years, the big global firms will not be the big firms we know today, they will be the likes of the renewable firms, the smart energy firms and the water infrastructure firms.”


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