Carbon traders widen horizons despite bullish market forecasts

A strong forecast for the €90bn carbon markets from Mercer in February and a significant boost from the UK Government today might still not convince traders to focus solely on them.

What they describe as “huge price volatility”, opportunities elsewhere and links between energy markets is convincing managers to broaden activities instead.

Mercer has forecast carbon could reach €220 a tonne by 2030 if a lack of co-ordinated policy to tackle climate change persists.

Today the consultants welcomed the UK Budget announcement of a £13 floor in the price of carbon per tonne, rising to £30 per tonne by 2020.

The UK government also announced carbon capture and storage technology with £1bn funding, increasing green taxes as a proportion of total tax take, and an extra £2bn for a Green Investment Bank to support low-carbon investments “where the returns are too long-term or too risky for the market”.

However, carbon managers say they will not limit themselves to carbon investments alone. Another key reason to diversify was the theft in January, suspected by organised crime, of national registries recording carbon trades.

The European Commission froze spot trading temporarily, causing negative publicity and disruption.

Despite this, managers are keeping a finger in the carbon market, eyeing predictions of sharp price rises and increasing allocations to the strategy.

Mercer said allocators will have to shift up to 40% of portfolios to environmentally-friendly areas, such as carbon, to avoid the damage global warming will do to the rest of their investments.

The dissipation of concerns of double dip recession already helped prices for EU allowances (EUA) jump 8.7% last year.

Luis Neira, head of environmental commodities at Pan Energy Markets (PEM), says some of the key features for the coming year will be the auctioning of Phase III allowances, and “emerging economies and new nations showing keen interest to participate within the market place”.

While these developments take place, he says, “early movers definitely will benefit from developing sectors and markets, and eyes will also be on gold prices.”

Neira adds it is important not to view carbon in isolation. “It is beginning to mirror the rest of the energy complex. Looking at the energy sector as a whole will give a good indication of how to trade carbon.”

Matt Brownie, advisor to Carbon Growth Capital, says that concerns over the market thefts are another reason to diversify.

“We need to have a broader strategy, given all the political concerns. The markets became a bit stagnant after certain political events, so we need to have other things we can trade on top of carbon. I am optimistic about the future of carbon trading in general, but as part of a broader strategy.”

PEM expanded its focus into global energy and environmental trading since starting focused on carbon in 2009. Neira says expanding was “a natural step moving across the energy spectrum”.

PEM’s business now ranges from spot trading to project financing, natural gas trading, bio-fuels, metals, and coal. “We have moved from originally day trading to working on larger, longer-term contract negotiations within global commodities.”

David Walker

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