Info About Carbon Investment

Info About Carbon Investment

Carbon investments, investment in carbon credits and investment or trading in the carbon market are beginning to become buzz-words in investment circles. Particularly over the past year both institutional and private investors have been gathering information and beginning to dabble in carbon investments.
Some of the larger investment banks such as JP Morgan, Morgan Stanley, Goldman Sachs and Barclays Capital, have already established carbon trading departments and made carbon investments. However, there is still a degree of confusion over carbon investments by many investors, which we will try to clarify here.

What are Carbon Credits?

In a nutshell, a carbon credit is the financial instrument, which represents one metric ton of carbon pollution, and carbon trading is a system which was initiated by the Kyoto Protocol of 1997.
In order to preserve a high probability of keeping global temperature increase be¬low 2 degrees centigrade, current climate science suggests that atmospheric CO2 concentrations need to peak below 450ppm. We are currently at 395ppm and rising faster than at any time in the past 400,000 years, at a rate of 2ppm each year." This requires global emissions to peak in the next decade and decline to roughly 80% below 1990 levels by the year 2050 (Baer and Mastrandrea, 2006).
What changes hands in carbon trading is the right for industries to emit a certain volume of Co2, putting a price and cap on such emissions.

The European Union Emissions Trading Scheme (EU ETS)

Also known as the European Union Emissions Trading System, this is the largest multi-national carbon emissions trading scheme in the world and a major pillar of EU climate policy. The EU ETS carbon credit scheme currently covers more than 10,000 installations with a net heat excess of 20 MW in the energy and industrial sectors which are collectively responsible for close to half of the EU's emissions of CO2 and 40% of its total greenhouse gas emissions.
Besides receiving this initial allocation, an operator may purchase EU and international carbon credits. If an installation has performed well at reducing its carbon emissions then it has the opportunity to trade its remaining carbon credits and make a profit. This allows the carbon trading system to be more self contained and be part of the stock exchange with little government intervention.
These units are a fixed quota issued by NAPS (national allowance plans), given out for a period of several years at once (a ‘trading period’), with a life-cycle of the given trading period by which point the carbon credits must be retired. There are proposed amendments that from the beginning of the system’s third trading period from 2013 should see a centralised EU administrative body replace the current national structures.

Kyoto-CERs (Certified Emissions Reduction)

As of 2008-9 the EU’s decision to accept Kyoto ratified CER’s carbon credits as equivalent to the EU ETS, has been fully integrated. It is now possible to trade EUA's and UNFCCC (United Nations Framework Convention on Climate Change ) validated CERs on a one-to-one basis within the same carbon trading system.
CER’s are produced by CDMs (Clean Development Mechanisms). The CDM allows industrialized countries to invest in emission reductions wherever it is cheapest globally, and is supervized by the UNFCCC. CDM projects are predominantly located in South America, Asia and Africa, although their global presence is spreading.
Industrialized countries, and companies located in the industrialised world then buy these CERs to offset the deficit between their allowance (of EU ETSs if the country is in the EU) and their Co2 output.Read More