Institutional Investor's Alpha Magazine - April 2008 - (Page 75)

Strategies Carbon Trading G areth Hughes is delivering an impromptu lecture on the intricacies of international climate change policies, holding forth on his cell phone from the backseat of a cab making its way through central London to a client meeting for which he will probably arrive late. Hughes is clearly a man in a hurry, mining the proﬁts in the world’s worst sources of air pollution as managing director of Climate Change Capital, a London investment bank. The subject is hardly new to Hughes, who has spent much of his career working on climate change policies and energy-related investment in the U.K. and is now in a race to put Climate Change Capital ahead of the competition in the emerging carbon-emission-reduction business. Plenty of potential competitors are on his tail, particularly from across the pond. Well-ﬁ nanced managers — equity investors and hedge fund types — are trolling for proﬁts in the accelerating race to capitalize on programs to curb global warming. Climate Change Capital is one of the early entrants. Its wide-ranging investments include wind and solar power, biofuels and energy-efﬁcient construction. Probably its most promising foray is its potential play in carbon credits, the chits earned by companies that reduce their carbon dioxide emissions below a stated or regulated goal. As governments tighten controls on emissions, Hughes ﬁgures that companies like his will be in a position to cash in. “You can’t sit on the sidelines anymore,” he says. “If you are trading in equities, you have to look at the carbon cost or opportunity and see what the differential effect will be on companies you are investing in.” Indeed, ever since former vice president Al Gore started attracting attention with his documentary An Inconvenient Truth, the investment world has awakened to the proﬁt potential in saving the planet from global warming. The trade in carbon credits is touted as the next great opportunity, an emerging market that could one day surpass commodities trading in volume. But it has its own A Convenient Truth By Irwin Speizer peculiar yin-yang — a combination of altruism, fear of government sanction and, of course, old-fashioned greed. The foundations of the new carbon market are national, regional and international agreements and regulations aimed at reducing the amount of carbon dioxide that human activity releases into the air. In Europe, where the system is relatively far along, countries have signed on to international agreements like the Kyoto Protocol, which sets limits on carbon emissions. Such agreements guide regional and national laws that set targets staggered over time for reducing The combination emissions and include steep ﬁnes for companies that fail of global warming and to meet those targets. Layered onto carbon growing environmental emission limits are soconsciousness is called cap-and-trade policies that let companies creating a potentially earn credits for meeting or exceeding targets and huge market in the then sell them to compatrading of pollutionnies that fall short. Speculators can buy and sell emission credits. those credits as well, in much the same way grain and oil are traded. Despite the rules that let some companies continue to pollute (at a cap-and-trade price set by the market), countries that sponsor such programs will, in theory, see carbon emission levels steadily decline. The U.S. market lags Europe’s in part because the Bush administration opted out of Kyoto and has yet to adopt rules on carbon emission reduction, a circumstance that seems bound to change. All three top presidential contenders favor enacting a cap-and-trade program. The Republican nominee, Senator John McCain, was an early proponent, but his proposal remains sketchy. The leading Democrats offer more-aggressive and in-depth policy positions. Both Senator Hillary Clinton and Senator APRIL 2008 • INSTITUTIONAL INVESTOR’S ALPHA • 75

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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