US Embraces Carbon Trading

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In the week in which Governor Schwarzenegger secured a deal to introduce carbon trading in California, a new report by carbon market analysts New Carbon Finance shows that despite rejecting the Kyoto Protocol, the US is already the favoured location from which to manage carbon funds.

More than €5bn has been invested in 50 carbon funds worldwide to date. About three fifths of the money comes from governments looking to meet their targets under the Kyoto Protocol, with the rest coming from private investors. New Carbon Finance’s research shows that around 39% of the private money and 23% of the public money in carbon funds is managed out of the US.

The UK handles the next largest volume of private money, with 29%. The number three management centre, Singapore, lags a long way behind with 9%, followed by Norway and Spain with 5% each. Even when it comes to public funds, the US is still by far the mostfavoured location for carbon fund management, accounting for 23% of funds under management, but elsewhere the spread is more even.

Michael Liebreich, Director of New Energy Finance, said: “It is interesting to see the US leading the world as the location from which carbon funds are being managed. I believe this shows that the US will quickly catch up with Europe when they launch domestic carbon trading, whether under Governor Schwarzenegger’s recently agreed scheme for California, the Regional Greenhouse Gas Initiative in New England, or eventually under any national initiative.”

State involvement in smaller European countries outstrips that of the continent’s economic powerhouses. Portugal manages 13% of public carbon funds, while Austria, the Netherlands and Spain are each responsible for controlling 9%, although we expect Spain’s share to increase significantly as it introduces more credit purchasing programmes to make up its deficit under the Kyoto Protocol. Belgium, Ireland and Denmark manage 7%, 7% and 5% respectively. The UK (3%), France (2%) and Germany (1%) are outshone by Switzerland’s 5%, while outside Europe, Japan handles just 0.8% of total public money invested in carbon funds, although
Japan is a major investor in a number of funds managed elsewhere in the world.

Fund types are split between sell-side funds and buy-side funds. Sell-side funds invest directly in projects and include, for example, funds managed by Ecosecurities and AgCert Plc, the FE Global Asia, Clean Energy Services Funds and the Russian Carbon Fund.

Buy-side funds can be split into two. Compliance buyers buy carbon credits so they can meet greenhouse gas (GHG) emissions obligations. They can be either governments, with obligations under the Kyoto Protocol, or companies with obligations under the EU Emissions Trading Scheme. Intermediary buy-side funds purchase carbon credits so they can later sell them on to governments or companies that will need them to hit their targets.

Guy Turner, Director of New Carbon Finance and who led the research said: “It is critical for investors to understand the volume and the nature of funds targeting the carbon markets. If you don’t, you won’t know how many funds are out there competing with you for the same credits.”

To date, 86% of the money flowing into the sector through carbon funds has been for buy side purposes (compliance and intermediary). However, this increasing monetary flow into the buyside risks eroding profits available to buy-side investors. The smart money is now looking more closely at direct investment in projects in order to capture a greater share of the carbon value chain. This is evidenced by the emergence of new specialised sell-side funds such as Carbon Capital Market’s newly launched Carbon Assets Fund, as well as the continuing success of the existing sell-side players. Proportion of Invested Funds by Country of Fund Manager Management of Private Capital Country Proportion of Funds
Argentina 0%
Denmark 1%
Finland 3%
France 2%
Germany 2%
Japan 4%
Norway 5%
Singapore 9%
Spain 5%
UK 29%
US 39%
Total 100%
Management of Public Capital
Country Proportion of Funds
Austria 9%
Belgium 7%
Denmark 5%
Finland 2%
France 2%
Germany 1%
Ireland 7%
Japan 1%
Netherlands 9%
New Zealand 3%
Portugal 13%
Spain 9%
Sweden 1%
Switzerland 5%
UK 3%
US 23%
Total 100%

About the New Carbon Finance Funds Report

Investors and fund managers need to know how prices in the international carbon market are likely to evolve, which is dependent on the future levels of demand from Kyoto countries and the supply of CDM and JI credits. If there is excess supply of credits, prices in the international market could fall significantly, hitting the value of many of the private sector speculative funds. The inaugural New Carbon Finance Funds Report will help investors:
• Understand the carbon fund sector and its structure;
• Follow the key stages in the carbon asset value chain;
• Analyse investment in the sector to date, and where this money is managed and invested;
• Identify the supply and demand drivers affecting the value of the sector;
• Assess opportunities and risks facing the sector.

This definitive 40-page report contains numerous tables and figures to help readers understand the investment trends in the sector. It is available from New Carbon Finance at a price of £695 /$1,320 / €1,040 plus VAT (for UK customers).

About New Carbon Finance:

New Carbon Finance, a service of New Energy Finance, is a leading provider of analysis on the global and European carbon markets. New Carbon Finance's Carbon Balances Model, which provides unique insight into the underlying carbon price drivers, was developed over the past three and half years, and is used by leading energy corporations and investors. New Energy Finance’s other services cover all stages of investment activity in renewable energy and lowcarbon technology, including venture capital, private equity, public markets, asset-based finance and M&A.

For further information:
Guy Turner
Director, New Carbon Finance
Tel: +44(0)207 467 2665
guy.turner@newcarbonfinance.com

Michael Liebreich
Founder & CEO, New Energy Finance
Tel: +44 20 7727 8590
michael.liebreich@newenergyfinance.com

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Publication Date: 06 Sep 2006

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