Saturday, July 7, 2007

Bullish on Carbon

In London, the carbon trading market is exploding, according to a New York Times article excerpted here:
Carbon could become “one of the fasting-growing markets ever, with volumes comparable to credit derivatives inside of a decade,” said Chris Leeds, 38, who is the head of emissions trading at Merrill Lynch here and who plans to expand his team to five traders from two by the end of the year.
Investment banks like
Goldman Sachs and Morgan Stanley have rapidly expanded their carbon businesses. Scattered among the hedge funds and private equity funds in the Mayfair district of London are recently arrived niche investment banks that generate one of the main currencies of this emerging sector: carbon emissions reductions.
The emergence of carbon finance in London — not only trading carbon allowances but investments in projects that help generate additional credits — is largely the result of a decision by European governments to start limiting the amounts that industries emit.
Factories that pollute too much are required to buy more allowances; those that become more efficient can sell allowances they no longer need. The system, started in 2005, is part of the terms of the Kyoto Protocol and bears the imprimatur of the
United Nations. Even so, doubts remain as to whether carbon finance can deliver tangible emissions reductions, let alone the vast economic transformation needed to deal with climate change.
For now, green-minded graduates and an eclectic range of professionals from banks, consulting companies and aid organizations are pushing to join the new sector.
“We don’t have to advertise,” said Mark Woodall, 45, chief executive of Climate Change Capital, an investment company based in an elegant 18th-century townhouse in the heart of Mayfair. ”People feel quite good about working in an organization like this.”
Mr. Woodall has 120 employees with an average age around 30 and more than 10 full-time employees in China. He expects to hire 80 people in the next two years.
A former British Army officer, he started his first company 15 years ago, cleaning up waste and chemical spills.
The industry has not avoided criticism. One reason is that European governments handed out too many free allowances in preparing for the start of the program, rendering the system less effective than was hoped. The overallocation fueled volatility, and some traders reaped larger-than-expected profits.
Controversy has also dogged some projects promoted by the financiers to generate new credits.
But over all, prospects for the industry are good, especially if the United States joins the Europeans in establishing a trading system, said Imtiaz Ahmad, 34, senior carbon trader for Morgan Stanley in London. Mr. Ahmad has already lured a
European Union environment official and a BP employee to join his three-member trading team, and he plans to hire more.
Human activity creates some 38 billion tons of carbon dioxide each year, and governments regulate only a fraction of that. But if more governments decide to cut billions more tons of emissions, as leaders of top industrial nations discussed recently in Germany, and if the existing system in Europe is enlarged to cover transportation, there will be many more credits available — and a lot more finance and trading.

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