As the global financial markets sink farther into turmoil, one asset class is enjoying business as usual. Carbon asset trading continues to be stable. Indeed, growth predictions for the near term, at least, are expected to remain largely unchanged. First Climate Asset Management, a new Luxembourg-based offshoot of the German firm First Climate, helps its clients profit from the possibilities of carbon trading. Speaking on Thursday, Markus Hüwener, CEO First Climate, presented the company and its area of expertise.

A market designed to help the planet

Climate change, and the part human activities play in it, has become widely acknowledged as a significant problem needing immediate and sustained action on the part of governments and businesses worldwide. The first phase of the1997 Kyoto Protocol, which came into force at the beginning of 2005, requires its signatories to reduce their greenhouse gas (GHG) emissions to 5.2% below 1990 levels by 2012.

A “cap and trade” mechanism was instituted, giving each installation of an affected business certain allowances. As the allotted allowances frequently do not cover the total volume of GHGs released in normal business activities, the Protocol also made it possible for companies exceeding imposed limits to buy allowances from those able to meet the requirements - the “trade” part of the cap and trade system. Equally, given that in terms of climate change, it doesn't matter where the CO2 is eliminated; the Protocol also encourages the implementation of emissions-reduction technology in less-developed countries through Clean Development Mechanism (CDM) and Joint Investment (JI) projects. Taken as a whole, the hope for the Kyoto Protocol was that it would not only encourage but force the adoption of low-emissions business processes.

Concretely, First Climate assists its clients at all points in the chain, offering advisory and management services. For those looking to invest in CDM projects, the company identifies opportunities most likely to produce significant returns. First Climate also assists in the complex process of certification and registration necessary to ensure that a project receives carbon credits on completion. To Western companies needing to buy allowances, investments in developing-world emissions reduction can be a cost-effective way to meet their own goals.

As Hüwener explained, reducing one tonne of carbon in the West costs significantly more than doing the same by encouraging clean energy and industry in a less-developed country. However, because the regulations surrounding a CDM project are complex, the savings can quickly evaporate for investors if these are inexperienced in dealing with the process. For their clients in this area, primarily small family funds and hedge funds, First Climate's expertise is invaluable.

A stable market

The carbon market correlates only weakly with other markets, making it an attractive way for more risk-averse investors to diversify. According to Hüwener, there are several reasons for this that should inspire confidence for the coming period. He cites first the stringent and decreasing caps on emissions imposed by governments, which ensure that demand will remain robust despite the economic slowdown in production. Equally, reductions in energy consumption will not necessarily impact carbon trading.

For example, a recent preference for coal over natural gas requires many producers to buy more allowances. The community investing in the carbon market also lends it stability. Some players, such as energy utilities, are required to take part. The funds and other non-compliance investors in the market are completely unleveraged, making the kind of crash currently seen in other markets highly unlikely. First Climate itself currently has returns of 7%, expected to reach 15%, a projection about which Hüwener remains confident despite the economic climate.


Source: www.paperjam.lu/archives/2008/11/2410_nl_Climate/index.html