Business Climate International provides you with the following article on Climate Change, originally published on the website Business Spectator.

Carbon may well be the world’s fastest growing traded commodity, and will one day be the biggest, but right now it’s no place for the faint-hearted, as the ever-growing ranks of carbon traders are finding.

The biggest difference between carbon and other traded commodities is that carbon hardly ever trades for long just on market fundamentals. Instead, it’s heavily influenced by the ever shifting nature of national and international policy.

Take the experience of Eco Securities, the largest trader in carbon credits. It listed its own stock on London’s Alternative Investment Market in 2005 with the brief to trade credits generated by the UN’s clean development mechanism.

Its shares quickly jumped from 90p to more than 421p, but has slumped 70 per cent this year alone because of delays in project registration and an ever-shifting maze of international legislation.

It’s not the markets’ first such experience. The European price of carbon tanked in April 2006 from above €30 to less than €6 when it was discovered that too many permits had been allocated. That error, caused by a lack of verifiable data, was later compounded by a decision not to allow hoarding of carbon credits. That ruling sent the price below €1.

Australia has had a similar experience. The New South Wales Gas Abatement Scheme, which remains the second biggest carbon market in the world after Europe, slumped by more than half last year after it entered a policy vacuum following the federal government’s move to a national emissions scheme. Its demise killed off several emission abatement projects.

Renewable Energy Certificates, Australia’s first market, has also experienced a roller-coaster ride as state or national renewable targets are set, withdrawn or expire. The certificates traded up to $39 each in 2004 before slumping to around $11 in 2006 after the Howard government refused to extend the national scheme. Labor’s planned 2020 target has lifted the certificates back into the mid $40s.

According to the World Bank figures released last week, some $US64 billion of carbon was traded in 2007, mostly in the European carbon trading market. By 2012, when the Kyoto successor comes into force, that figure will rise six-fold. By 2020, according to some predictions, it will be worth well over $US1 trillion.

While that statistic will make it the world’s most traded commodity, outranking crude oil, and though it is already attracting the attention of the globe’s investment banks and numerous specialist carbon funds, carbon trading is considered to be a risky business.

That’s an issue for current and future carbon market players in Australia. Even though the national emissions trading scheme is not set to commence until 2010, an over-the-counter market is expected to start some 12-18 months before the formal launch, and some participants are already talking of a “grey market” that has already begun between some coal-fired utilities and various counterparties.

They are trading in a knowledge vacuum. The government’s Green Paper on the proposed emissions scheme is not due to be released until later this year, and a final bill will not be presented to parliament before next March.

Even then, the nature of the successor to the Kyoto Treaty will still not be known, and there are myriad other variables, including the intentions of the US, the potential linkages of Australia’s scheme to other national schemes, and the positions of the major emitters such as China and India.

But if carbon is, one day, finally able to trade on market fundamentals based around sound policy and an agreed reduction target, it is not exactly clear how the market will perform.

There is a wide assumption that carbon prices will continue to rise as permits become more scarce. There are some suggestions that the carbon price could reach $200 a tonne or more, even as early as 2020, and certainly by 2050, when a global reduction target of at least 60 per cent would be set.

But Macquarie economist Brian Redican challenges the view that the market can rely on an ever increasing carbon price. Redican says the market price, like any other commodity, will be heavily influenced by forward contracts.

But the carbon market is designed for one purpose: to price the commodity out of existence. So what happens when it appears that a technology could emerge that achieves that goal?

Redican describes it as a chicken and egg situation. When a technology emerges, how will the market price-in future contracts? “If the emission trading system works, then the right to burn carbon is worthless,” he notes. And without a significant price signal, will that technology get the funding to get off the ground?

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