Canada Unveils Carbon Market Plan
Its been a year (May 2008) since I wrote an article regarding carbon emission credits and related information (Canada begins trading carbon emission credits on the MCeX). Since then not much news in Canada has surfaced due to the problems of the financial crisis taking priority. But on Wednesday (June 10, 2009), the federal government of Canada detailed its plan to trade pollution permits (carbon credits) on the open market. Two draft documents were released by Canada’s Environment Minister Jim Prentice. The drafts lay ground rules for a federal carbon-offset scheme. This included guidelines of which offset project qualification, applying for inclusion, offset credit value, verification of emission reduction, etc.
With a cap on greenhouse gases, the government will allow firms to buy and sell emissions permits. Companies or industries that do not yet have the technology or capability to cut emissions, can buy credits in order to meet government-mandated targets. The government aims to lower greenhouse gases by 20% by 2020 (from 2006 levels). The companies buying the credits are essentially reducing emissions, “on paper”. Companies that can meet emission targets before 2006 will receive credits.
The carbon-offset projects have to have started after January 1, 2006, in order to be eligible for the federal trading system. Carbon offsets made after January 1, 2011, will count toward the reduction targets that industry will be required to meet.
The terms carbon trading, carbon credit trading, carbon emissions trading, carbon emissions credit trading, and other similar terms all usually refer to the trading of CERs (Certificates in Emission Reductions), EUAs (EU Allowance Unit, certified as EUR), CFIs (Carbon Financial Instrument), in one form or another. Carbon emissions trading is emissions trading specifically for carbon dioxide is calculated in tonnes of carbon dioxide equivalent or tCO2e, and currently makes up the bulk of emissions trading. An offset credit is equivalent to one tonne of carbon dioxide. The Environment Minister said the federal government will not set the price of carbon offsets and will allow the market to dictate the price of permits.
The regional trading schemes have surfaced due to the absence of a continental or national carbon market. The Western Climate Initiative is a coalition of Canadian provinces and U.S. states that plan a regional market to trade carbon emissions. Ontario and Quebec plan to have an inter-provincial carbon-trading system. Prentice plans to harmonize and strike equivalency agreements but the draft scheme will be the “gold standard of offset credits that will apply in Canada”. The government also plans to work with the United States and Mexico to develop and implement a single system between 2012 and 2015.
Investing In Carbon Credits?
Now the question you will ask is how to make money from this? I see three main possibilities for individual investors:
1. Stocks of companies who specialize in buying and then selling the carbon credits. I’m usually weary of companies who profit only from trading, as I must rely totally on the company’s management and ability of their traders, as they have no products. In such a situation there are few companies who are doing this and they have short track records.
2. Stocks of companies who sell the carbon credits. Companies that have the technology or capability to reduce and cut emissions efficiently receive credits. Such an example will be environmentally friendly / green energy companies. Usually they will be solar or wind farming energy producers. Not all companies are well run or are profitable, as always due diligence in research must be done. Make sure you invest in a company for its business, not just because it is generating credits.
3. Carbon Emission Credit ETF. With so many new or young companies involved, the stocks you evaluate may not meet the quantitative or qualitative criteria for a good investment. There would be too much uncertainty in the companies themselves, or their price may already be over inflated from the hyping up of the early investors. However, the market itself might be a low from time to time. An ETF might be one method. Not sure if there aren’t any right now, but its very likely there will be in the near future. Where there is money to be made in a market, an ETF will follow.
4. Carbon Emission Credit Futures contracts. A strategy can be used similar to trading of any other commodity futures contracts. If you don’t know how, but want to take this route, you need to read up & get up to speed on the trading of futures first.
5. Mutual Funds that specialize in trading carbon credits or investing in green companies. As with all mutual funds the management team has to be of the highest caliber you rely totally on their ability to trade and make smart investments with your money.
Of course other ways will appear as the market becomes more definied, legislation becomes more stable, and there is widespread adoption of carbon trading by industry. AS WITH ANY NEW SYSTEM, INVESTORS MUST TREAD CAREFULLY! Trading carbon emission credits is still in its infancy, many issues and complexities in the carbon emission credit system still need to be ironed out! Adoption of the system and widespread use by industry still need to be seen over a period of time with the climate exchanges. Whenever government is highly involved, investors need to be careful. We need to see if the current and upcoming legislation by governments actually work or not, and monitor what positive/negative impact they may have.
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Thanks & Happy Investing!
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