07 March 2009

Carbon market in meltdown, but still a long-term goldmine

Carbon markets are in a tailspin. Point Carbon recently predicted a 32% plunge in total market value and EUAs have slumped to €10 from 3x that a year ago. The credit crunch has refocused purchasers on counter-party risks, whilst the economic contraction means lower production, lower emissions, and lower overall demand. But the long-term drivers in this market - global regulations, impending climate disaster, higher energy prices, and near universal public support for action - continue to make the market a good long-term bet for investors and entrepreneurs.

The question is whether carbon asset developers and other credit initiators can ride out the inevitable fillips in prices until the post-2012 regulations become clear. That in turn depends on outcome of many months of tough ongoing negotiations and horse trading. It is unclear whether climate diplomats can deliver the much needed alignment of international actors to avoid "leakage" (where emissions migrate to the least regulated markets). Crystal ball gazing on the final shape of a treaty is next to impossible, so the key is for firms to remaining nimble enough to change their business models to continue mining credit gold in a post-Kyoto world.