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As global carbon-trading market stumbles, investors think locally

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By Ben Sills, Saturday, March 26, 6:12 PM

Vibhav Nuwal was once an enthusiastic supporter of the global carbon market. The Indian-born banker started in September 2009 to develop carbon credits, targeted at investors in Europe and Japan, for Mumbai-based private-equity fund Managing Emissions. Less than a year later, he quit his job, convinced that the United Nations’ failure to broker a global agreement to reduce greenhouse-gas emissions meant that the carbon credit market was effectively dead.

Now, Nuwal, 32, has set up a business helping companies that earn incentives from renewable-energy projects under a new Indian government program. Nuwal says that in the absence of a global consensus, investors are more likely to channel funds into incentive programs in local markets such as India, where they can make three times as much as they do selling credits under the global, U.N.-sponsored plan.

“There is a base being built for a really strong local economy around this,” says Nuwal, a former J.P. Morgan Chase investment banker. “Carbon is getting more and more difficult. A significant amount of the business that is done in the carbon space should shift.”

Nuwal’s decision is one more sign that the consensus reached 14 years ago by 193 nations and the European Union in Kyoto, Japan, may have fractured beyond repair. The plan, which introduced greenhouse-gas restrictions to support a global carbon market, is breaking down as the United States and China grapple over how, when and to what extent they can reduce pollution.

With the two biggest economies blocking progress on emissions, global temperatures last year matched the record highs of 2005 while droughts and flooding wrecked harvests from Karachi to Rio de Janeiro. Today, the price of carbon languishes at less than half the level Deutsche Bank says is needed to meet the U.N.’s aims for controlling global warming. Officials and investors say local initiatives such as Nuwal’s may offer the best chance of both slowing emissions and making money from the process.

“People are moving on to Plan B,” says John O. Niles, director of Tropical Forest Group, a nonprofit lobbying organization. “That means taking what we can get wherever we can get it.”

The latest casualties of the death of the Kyoto plan may be the companies and executives who bet their careers and their capital that credits to release carbon into the environment would become a globally traded commodity to rival the $21 trillion market in crude oil.

So far, the carbon market is a comparative blip on the landscape. Banks and brokers traded $128 billion of carbon credits last year.

‘Not enough investment’

“All the people I’ve seen who went into carbon trading have failed and moved out,” says Jason Kennedy, chief executive officer of headhunter Kennedy Associates. “There’s not enough volume, not enough pay and not enough investment.”

Even pilot programs are being killed.

IntercontinentalExchange closed its voluntary carbon-trading platform on the Chicago Climate Exchange on Jan. 31, while J.P. Morgan Chase shut down carbon credit origination at several offices and fired staff after acquiring EcoSecurities Group, the biggest offset developer. The Geneva-based International Emissions Trading Association says its membership has declined about 16 percent since the international divisions emerged at the 2009 annual climate summit held in Copenhagen.

There was little anticipation of such a failure in December 1997, when U.N. members, after 11 days of talks in Kyoto — Japan’s former imperial capital — agreed to reduce emissions in wealthy countries by 5 percent from 1990 levels. Those nations pledged to reduce emissions of the six key greenhouse gases that scientists say are largely responsible for changes in the Earth’s atmosphere: carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, perfluorocarbons and sulphur hexafluoride.

Developing countries, including China, weren’t given carbon limits and could sell credits to Western nations if they reduced their own emissions.

A market imagined

The United States, then the world’s biggest polluter, turned away from the deal. President Bill Clinton, who pushed for carbon trading to be included in the treaty, never submitted it for ratification, gauging that he couldn’t muster the 67 votes required to win approval in the Senate. Clinton’s successor, George W. Bush, supported the carbon-trading concept during the 2000 campaign but reversed his position after taking office.

Barack Obama’s election in 2008 revived hopes for a real global carbon market after he pledged to make climate change a priority for the United States. As a candidate, Obama supported cap and trade — a system in which companies can buy and sell a gradually declining number of emission permits. The plan would allow cleaner organizations to profit by selling their credits to more polluting enterprises. Yet once in office, Obama focused his legislative efforts on passing changes to the health-care system.

“After all these years, what we can say is there is a strong cultural resistance in the U.S. to a move to cap carbon,” says Emmanuel Fages, an analyst at Orbeo, a carbon-trading joint venture between French investment bank Societe Generale and chemical manufacturer Rhodia. “Whatever the excuses, whatever the context, they just don’t manage to pass any constraining carbon cap into law. They cannot.”

Trade stalled

“Ten years ago, you would have said by 2010 carbon will be a global commodity just like all the other commodities, fungible across different regimes,” says Jon Anda, vice chairman of UBS’s securities unit, who runs the firm’s environmental business. “We didn’t get any of that.”


Written by David Darmawan

March 28, 2011 at 8:08 am

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