Trading in quotas of carbon dioxide (CO2) emissions, to officially begin on the world’s first carbon market in the new year, promises to be lucrative for a number of financial institutions, experts say.
Some 2.3 million tonnes of the gas exchanged hands in October on the informal CO2 futures market, as much as the first nine months of the year, according to Point Carbon, a provider of independent analysis on the trading of greenhouse gases.
“The market has been growing very quickly since the summer,” said Atle Christiansen, a director of Point Carbon.
The European carbon market, to begin trading officially in January, is one of three incentives under the UN pact aimed at easing companies’ costs of reducing CO2 pollution, the main culprit for global warming.
The Kyoto Protocol requires three dozen industrialized countries to reduce or stabilise their emissions of CO2 and five other greenhouse gases between 2008 and 2012 relative to their 1990 levels.
EU nations agreed overall to an eight-percent cut in emissions while the bloc’s governments have set individual emissions targets for 12,000 installations.
A company that works hard to keep emissions low can sell their unused quotas on the carbon market to a firm requiring additional limits to avoid financial penalties for overshooting set targets.
Currently on the unofficial carbon market, one tonne of CO2 trades for an average price of 8.5 euros (11 dollars), according to James Emanuel, a director for brokerage firm Evolution Markets.
“But the price is fluctuating quite widely,” he said. “The lowest is 5.0 euros and it’s been as high as 13.4” since informal trading began in February
The European Commission has said it has no view on what the price of allowances should be. “The price will be a function of supply and demand as in any other free market,” it says on its website.
Analysts forecast a market worth 50 billion euros during the 2005-07 contract period, with 5.0 billion tonnes of CO2 being traded at an average price of 10 euros a tonne.
It could even go higher, according to experts.
“The allowances are going to be traded probably on multiple occasions, so the market will probably be a multiple” of 50 billion euros, Emanuel said.
Christiansen meanwhile said the market could quote a value of “about 80 billion euros by 2007”.
Such figures have caught the eye of financial institutions, keen to capitalise on hefty commissions earned by playing the role of broker.
Banking giants Barclays, Fortis and Dresdner Kleinwort Wasserstein have so far played key roles in acting as go-betweens, according to Evolution Markets.
Around a dozen brokerage firms have also got in on the act, while other financial heavyweights including Morgan Stanley, Goldman Sachs, Deutsche Bank and Societe Generale are expected to come on board.
“We know that many other banks are definitely looking at this,” Christiansen said.
The carbon market has also caught the attention of energy giants.
Shell last month became the first company to strike a deal regarding trading of the 2008-2012 futures contract. The Anglo-Dutch group has agreed to buy or sell CO2 futures at the fixed price of 8.75 euros to an unnamed company, allowing Shell to hedge against any price fluctuations.
