Hedge funds see carbon opportunities

Rapidly developing carbon trading markets are creating a range of promising opportunities for hedge funds to participate in this new sector, says a report from Man Investments.

Carbon markets, already trading significantly, have sprung up as the result of measures taken to reduce carbon emissions, such as the sale of carbon credits. The European Union's Emission Trading Scheme last year saw financial volumes on exchanges and through brokers totalling EUR 14.6 billion, about three times the total for the previous year.

Thomas Della Casa, Head of Research for Man Investments and one of the authors of the report, says that, based on these opportunities, hedge funds have introduced, or are working on, new investment strategies, including: trading emissions, financing carbon projects, trading electric power, cross-commodity trading, long/short listed equity and private equity.

The report, An Update on the Carbon Market, is published in Man Investments' April Quarterly Review, which examines developments and trends in the hedge fund industry.

It observes that putting a value on emissions has now become mainstream financial thinking.

'Carbon trading is emerging as one of the most significant new sectors for hedge funds and we can expect continued rapid growth, particularly if the US and China in due course join in and establish their own carbon markets, as is widely anticipated,' said Della Casa.

Further conclusions of the report include:

  • Thermal power production will remain dominant for decades, despite action taken and planned to use alternative 'green' energy sources and to reduce carbon emissions
  • Potential for innovative clean coal burning technologies is immense. Despite the push for clean energy, global energy use is still rising. Hence, emission-free thermal power plants are, potentially, revolutionary technology.
  • Carbon projects reduce emissions elsewhere and generate credits that can be given monetary value.
  • The carbon market aims to place a cost on carbon emissions and a value on reductions.
  • The price of credits and allowances is set by factors such as weather and fuel prices. In the longer term, scarcity of permits determines price.
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