Pollution can be a risky business

PUBLISHED : Tuesday, 16 September, 2008, 12:00am
UPDATED : Tuesday, 16 September, 2008, 12:00am

Retail investors can get access to the emissions trading market by buying the shares of listed companies that either trade in carbon credits or invest in companies that help polluters reduce their emissions.

However, such investments are inherently risky, warn investment advisers, as indicated by the volatile price of carbon credits traded under the European Union Emissions Trading Scheme (ETS), and the performance of several counters listed on the London Stock Exchange's Alternative Investment Market.

Following its inception in 2005, as a market on which to trade carbon credits in a bid to put a price on pollution and reduce carbon dioxide emissions, the ETS exploded into activity, providing trading opportunities for credits owned by about 12,000 carbon emitters across Europe.

In its first year of operation, 362 million tonnes of CO2e (carbon dioxide emissions) were traded for Euro7.2billion (HK$81.45 billion). In the flurry of activity the price of a tonne of CO2e reached a peak of about Euro30 by the spring of 2006.

But the market was vulnerable to protectionist forces.

'It seemed to work, but brokers had not counted on the politics. Various national governments, anxious to protect their domestic industries, generously issued emission credits for free. This flooded the European market with too many credits,' says Allianz Knowledge, a research unit of global insurer and asset manager Allianz Group, that focuses on climate change, microfinance and demographic change.

The result was a meltdown in the value of the credits as the price of a tonne of CO2e plunged to below Euro10 within weeks, and by September last year to just 10 euro cents. Alarmed at the prospect of giving polluters a free pass at such prices, and what that would mean for its commitments to reduce carbon emissions under the Kyoto Protocol, European governments then set an EU-wide CO2e cap of 2.08 billion tonnes for 2008-2012 - 10 per cent below the aggregate allowances sought by member states - and pledged to reduce the issue of free credits.

That sent the price of a tonne of CO2e back to Euro23 by the end of last year, and analysts now expect the price to reach about Euro30 to Euro35 per tonne this year, Allianz says.

The moral of the story for those intending to invest in Australian Emission Units? Caveat emptor.