Forget equities, forex and even fixed income, emissions trading is where it’s at currently.
There a couple of reasons for the burst of fresh interest. First, business is booming. Climate Exchange has just recorded a 203% increase in contracts traded during May.
Meanwhile, the US House of Representatives is preparing to vote (Friday) on the Waxman/Markey bill, which if approved would see the US committing to cut greenhouse gas emissions (GHS) by 17% by 2020 (compared to their 2005 level).
The bill will also see the creation a cap-and-trade system, whereby exchanges such as the Chicago Climate Exchange (a subsidiary of the Climate Exchange) would provide the execution and settlement of GHG contracts.
Arbuthnot Securities says this could create a carbon trading market three times the size of Europe’s:
The EU has committed to cut emissions by 20% by 2020 and by 30% if other developed countries participate in the reduction of GHG’s, measured against 1990 levels. Against the same 1990 benchmark, the US proposals amount to a 4% cut. However, it is estimated that the base line GHG reductions that the US is expected to commit to will result in a market size that is three times that of the EU carbon trading market. The bill in its current form would force polluting industries to reduce steadily their emissions of carbon and the other GHG’s that cause global warming. It would also require utilities to generate 15% of their electricity from clean sources of energy like wind and solar.
New Carbon Finance expects to see the size of the global carbon market to rise to $1.2 trillion per annum post 2012, if the US commits to a cap and trade GHG system. From 2012 to 2020 we expect to see the extension to the Kyoto Protocol to be agreed at the Copenhagen summit in December 2009
Of course, getting exposure to this market does not come cheap; loss-making Climate Exchange is currently valued at £374m. Although as this chart shows, the company is somwhat cheaper than it was.