Friday, May 20, 2011

Credit Line for Polar Bears

It all sounded so promising as if with the mere exchange of bids and offers  the world’s environmental problems would be resolved.  The Arctic Ice would once again spread out to provide a home and ‘fridge for great numbers of contented polar bears and rain forest frogs would regain their “mojo” to once again flourish in numbers.

The promise to set up a system for trading carbon credits was in the Marrakesh Accords that followed the internationally recognized Kyoto Agreement.  A carbon credit is the right to emit one ton of carbon or carbon dioxide equivalent or in shorthand tCO2e.  The idea was to use well-developed trading practices already found in world markets to give economic value to carbon emissions.  

First the Kyoto Agreement capped greenhouse gas emissions and then markets mechamisms are used to allocate the emissions among the group of regulated sources.  Projects or practices designed to reduce greenhouse gas emission subsequently earn carbon credits that can be used to offset the emissions of others.  This gives rise to value in the credits which can then be sold to finance those projects and future efforts.

Perhaps we have not yet attained security for the polar bear, but there has been some progress.  Currently there are six exchanges trading in carbon allowances:  the Chicago Climate Exchange or CMX, European Climate Exchange (managed by CMX), NASDAQ OMX Commoditie Europe, PowerNext, Commodity Exchange Bratislava and the European Energy Exchange.  Certified Emissions Reductions (CERs) and European Allowances (EAs) are exchanged on these platforms.  One contract is equal to 100 CERs or 100,000 metric tons of carbon or carbon dioxide. 

So far, industrial countries, mainly the U.S. and members of the European Union, represent the major buyers of CERs and EAs while India and China the two major sellers.  

With all those market platforms set up, an investor might thinks there is a large number of carbon credits to be exchanged.  One of the first exchanges to open for trading carbon credits, the Chicago Exchange has traded over 650,000 contracts since August 2009. 

So far, industrial countries, mainly the U.S. and members of the European Union, represent the major buyers of CERs and EAs while India and China the two major sellers.  
The recent economic recession took its toll on trading volumes at the exchanges.  However, volumes are expected to recover as industrial activity resumes with the recovery.  The potential pipeline of CERs and EAs is in Europe is estimated to exceed 4 billion tons and 2.1 billion tons respectively through 2012. 

This might not impress some, but was enough to attract the attention of thieves.  After widespread reports of CER theft and fraud, the various exchanges have had to take measures to ensure the integrity of their platforms.  For example, in March 2011, Commodity Exchange Bratislava opened a suspicious carbon credits registry.

Animals the world over still have much cause for concern from an environmental standpoint, but it appears the ones with the opposable thumbs have taken a few steps to rebalance the planet.


Neither the author of the Small Cap Strategist web log, Crystal Equity Research nor its affiliates have a beneficial interest in the companies mentioned herein.

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