Carbon-credits booming as firms seek 'get out of jail free' card

Green investors in the UAE are hoping to make a healthy profit while salving their environmental consciences.

The London-based Advanced Global Trading (AGT) has opened a carbon-trading floor in Dubai, where any investor with US$5,000 (Dh18,373) or more to spend can take part. By investing in carbon credits, individuals and companies can, in theory, offset their carbon footprint, the total level of carbon emissions generated by their activities.

Carbon credits can also represent a lucrative investment. According to AGT, the price of EU Allowance carbon credits (EUAs) has increased by more than 20 per cent since January 1 and Barclays Capital predicts the price will rise by about 42 per cent by the end of next year.

The World Bank reports that the global carbon-trading market is now worth $144 billion, up 6 per cent from 2008 despite the global downturn, and is expected to grow to more than $1 trillion by 2025.

Market growth is being driven by individuals as well as companies eager to reduce their carbon footprints.

In the case of companies, a "green" organisation can profit by selling its credits, while one that continues to pollute can effectively reduce a large carbon footprint by acquiring credits. Individuals can also continue to charter private jets or run four-wheel-drive cars while "offsetting" the environmental damage they cause through the purchase of carbon credits.

But environmental groups such as Greenpeace are wary of viewing carbon trading as a panacea for the global problem of carbon emissions.

"In the best case, carbon trading can result in investment into green projects such as solar farms and other renewable energy sources," says Kert Davies, the US head of research for Greenpeace. "However, the worst-case scenario is illustrated by a true-life example of a power company investing in saving a rainforest in Bolivia while burning coal in Ohio."

Mr Davies says the weakness in the carbon-trading solution to the world's emission problems is that, if the Bolivian rainforest cannot be saved, the company in question will still continue to pump carbon emissions into the atmosphere and the entire operation will have had a massively negative effect overall.

"Some companies only see a 'get out of jail free' card when they look at carbon-credit trading. If you do something good for the environment, does it make any sense that you should then be entitled to do something bad to the environment? Of course it doesn't. And yet that is basically what corporate polluters are pushing for."

Greenpeace also believes that the growing market in carbon credits could result in unwary investors buying suspect credits from unscrupulous operators.

"Although there are willing partners who will, for a fee, arrange investment in carbon credits, carbon trading attracts a lot of chicanery and exploitation of loopholes. Investors should approach this area of investment with caution," Mr Davies says.

The carbon-trading market is also relatively immature. And, although the industry argues that its years of volatility lie in the future as it matures, the market has already had some unexpected shocks. The Chicago Climate Exchange was a prime example of the uncertainties present in a new market undergoing birth pangs. Its closure in the summer of last year was blamed on the US's reluctance to commit fully to fighting climate change.

Further uncertainty has resulted from the fact that UN talks to iron out a climate-protection framework for when the Kyoto Protocol expires next year have stalled amid differences between industrialised and developing nations. Countries including Japan and Russia do not want to extend the treaty, which binds 37 industrialised nations to targets for cutting environmentally harmful emissions.

But there is, nevertheless, widespread international support for the carbon-trading market, with the internet potentially playing an important role in its future growth. The international carbon-credit exchange, CTX, which was set up 18 months ago, for example, is open to online investors from around the world.

And, according to the World Bank, it is the market for carbon credits in so-called developing regions that is set to drive future growth. The bank reports that emerging nations are growing increasingly interested in using market-based mechanisms to fight climate change and many are now forming themselves into a network of new emissions trading programmes.

Despite the reservations of environmental protectionists, it appears that carbon trading is about to take off. But investors should be wary of two dangers. The first is the tendency of some investors to feel absolved of all responsibility to reduce their carbon footprint by other means. The second is the risk element inherent in the relative immaturity of the carbon-trading market.

pf@thenational.ae