For ultra-keen individual investors, there is now a NSW Government-sanctioned carbon trading scheme and, last week, the Australian Climate Exchange, a commercially-run electronic platform for carbon trading, was launched.
And, with both Australia’s major political parties now supporting a national scheme, there look to be more chances for trading. Indeed, an emerging marketplace structure – combined with a low entry price for carbon – may tempt some risk-averse investors to act now.
But while the opportunity for individual trading is out there, the experts warn of possible bumps in the road ahead…
As with any new market, investors need to be clear about what they’re getting into, including the new lingo. Critically, buying “carbon offsets” is very different from investing in “carbon credits”.
Buying “carbon offsets” is about funding various “green” activities – such as tree plantations – that make up for your own or somebody else’s impacts. It might make the world a better place and you feel better, but that’s generally the limit on the return.
Trading “carbon credits” is more akin to playing in the conventional – and volatile – commodities space, eg, price rises create or grab cash.
And, within the “carbon credit” category itself, there are many shades of gray, such as various seemingly competing schemes that “verify”, “accredit” or “certify” what’s a credit and what’s not. It means buyer beware.
Indeed, Tim Hanlin counsels a very strong read of his own and other product disclosure statements. As MD of Australia’s first private trading platform for carbon credits, he ought to know.
“In the last six months, we’ve definitely seen an increase in not only institutional interest, but individual investors as well. These are people who see an upside coming in the carbon price in Australia,” says George Krichnauff, who heads trading at Carbon Planet, a provider of boutique brokerage.
Indeed, there are now several “carbon credit products” for individual investors to consider:
1. NSW Greenhouse Abatement Certificates (NGACs) put a value on greenhouse gas cuts of projects certified by the NSW Government, eg, effectively a price on a tonne of carbon. NGACs are traded through a registry run by the NSW Greenhouse Gas Reduction Scheme, started in January 2003 (www.greenhouse.nsw.gov.au).
In NSW, the scheme is driven by mandatory emission reduction targets for big energy generators – and they can buy NGACs to help them meet their legal requirements. (The PR girl offering you free ‘green’ lightbulbs at the local Sydney shopping centre works for a company hoping to pile up a few NGACs.)
2. Greenhouse Friendly Credits also monetise greenhouse gases cut by the carbon tonne – this time through company projects verified by the Federal Government (http://www.greenhouse.gov.au/greenhousefriendly). For example, Global Renewables became credit-eligible by recycling greenhouse-nasty rubbish rather than sending it to landfill.
The Feds’ scheme is voluntary: unlike NSW, there is no big stick waved at anyone to buy credits.
The Greenhouse Friendly Credits can now be traded on the Australian Climate Exchange, launched last week. Via brokers, the exchange puts buyers and sellers together. There’s a minimum transaction of 100 Voluntary Emission Reduction (VER) units (or 100 tonnes of carbon). The Climate Exchange looks to bring NGACs on-line in due course as well.
Getting involved in either of the above products is seemingly straight-forward. As with any other trading, it’s a case of finding a broker. There are now specialist operators, including Austock, CarbonPlanet, Energy & Environmental Derivatives Brokers, Nextgen, and TFS Brokers. ABN-Amro also helps investors access the more established European market.
State of Play
So, is there “brass in muck”? What’s the conversion rate of “green” to “gold”?
In the NSW scheme, the current price for a tonne of carbon is around $10. This is a three-year low after topping out at $14.50 in mid-2006, but double the original list price of $5 in 2003.
On those figures, it’s possible that some early players – willing to have a surf on the speculative waves – have doubled their money in less than five years.
On opening its digital doors last week, the Australian Climate Exchange set an initial price of $8.50 per tonne.
In Europe, whose scheme may link to Australia’s, carbon futures contracts are trading from between $16 and $48 AUSD per tonne, while international economist Sir Nicholas Stern recently predicted future levels of up to $95 AUSD dollars per tonne.
The locals are encouraged but careful.
The Australian Climate Exchange’s Tim Hanlin says: “This market is stgeloping very fast. Six months ago, few believed that we would be up and running.” But he warns that caution is needed. “There’s definitely much more potential in the current price, but it’s hinged to greater certainty about policy settings, such as Australia’s reduction targets and the design of its scheme,” Hanlon said.
Krichnauff of Carbon Planet also points out the current lack of liquidity. The prospect of being stuck with credits that can’t be readily transacted would be particularly tough on your average individual investor.
Is it all hot air or real? Ken Edwards at Nextgen, potentially Australia’s largest current broker of carbon and other environmental credits, reckons interest is definitely growing.
“Green has now become all the go. Also, there are more people managing their own super and potentially looking at spreading their risk by going outside the conventional stockmarket,” Edwards said.
“It may be that some investors are looking to get in at a potential market low compared to the future value of carbon,” Edwards said.
But Edwards is also wary of spruiking: “It’s like trading in any other commodity, as well as very subject to the positive and negative forces of rule change and policy shift.”
An official with the NSW Government’s scheme sounds a more positive note: “Yes, trading in carbon is more like trading in gold and silver than it is like share trading. While there’s an ultimate limit on public companies’ market capitalisation, there is no end in sight in terms of needing to reduce carbon emissions.”