Is It Too Soon for Pension Funds To Invest In Carbon?

Over the past couple of days, I have noticed that emissions trading seems to evoke a wide variety of emotions from all kinds of different people: confusion, despondence, anger, and pessimism to name only a few.  I have been very much in the first camp of people, confused by the alphabet soup of abbreviations such as CDM, EUAs, ETUs, CERs, VERs, etc.  This morning, however, I attended a session on emissions trading presented by Trevor Sikorksi, the director of the Carbon Markets and Environmental Products Research Group at Barclays Capital.  He calmly explained the basics of the market and then went on to give us his predictions for the future and where he saw the politics, and perhaps more importantly, the price of tradable carbon going.

The first takeaway is that Mr. Sikorski is extremely bullish on carbon in Europe.  He believes that prices for the main EU carbon products (CERs and EUAs) can only increase over the next ten years.  What was most shocking, however, was his prediction that prices would more than quadruple over this time period despite Europe actually having a surplus of carbon credits.  In other words, it is not until the year 2017 that Mr. Sikorski believes carbon credits will be an operating constraint.  This was a considerable shock to me as well as many others in the room. 

Currently in Europe, power generation is the primary industry consuming carbon credits.  Almost all other industries are sellers, meaning that they are net long and have more emissions credits than they intend to use.  Given the current economic environment and need for new generating resources, the power industry will begin to purchase a considerable number of credits forward.  They will do this to hedge exposure (by selling power, buying either coal or natural gas, and buying emissions credits) and also to lock in profits in order to secure financing on new projects.  The end result is that starting in 2013, Mr. Sikorski believes that the demand for emissions credits will increase considerably driving prices up.  In any given year, the current demand will exceed the forward supply.  This will happen despite the fact that there is still a net surplus of credits.       

Several times in the talk, I heard Mr. Sikorski say that the price has nowhere to go but up.  Although his projections certainly seem to prove this, Phase I of the EU emissions trading scheme (where prices went to zero) points to the risks inherent in dealing with a market as volatile and politically risky as emissions.  Indeed, Mr. Sikorski concluded his talk by saying that he was still seeing little long-term investment in emissions products.  In other words, this market is still too uncertain and risky for many of the large sources of capital (such as pension funds) to get involved, particularly just being hurt by the recent economic collapse.   

The main political takeaway from the talk was Mr. Sikorski’s belief that regardless of what happens with the Kyoto Protocol and climate regulation overall, there will still be tradable carbon credits in various locations around the world, primarily Europe.  While the hope of a global carbon market is fading fast, the idea that any single carbon market will fade just as quickly seems false.  As long as Europe is committed, the world will have a functioning market for tradable carbon emissions credits with which to experiment and take away valuable lessons.


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