Is carbon the next big asset?
"Help me get exposure to carbon" is the call from investors worldwide, according to Credit Suisse's global head of carbon trading Paul Ezekiel.
With the federal government aiming to have an emissions trading scheme in place by 2010, Ezekiel earmarked carbon as the next big opportunity for savvy investors in his address at the eleventh annual Securities and Derivatives Industry Association conference in Melbourne on Thursday.
The carbon market has the potential to be enormous in size because it will involve all manner of industries and areas of the economy in Australia and around the world, as other countries become involved.
As a gas, carbon dioxide or Co2 is not like the stock market in the US, said Ezekiel, speaking via video link from the United States. "It's not a local market, its a global market."
The proposed trading scheme in Australia will cover 70 per cent of the countries' emissions. This includes 22 per cent emitted from power, 25 per cent from forestry (which includes avoiding deforestation), 22 per cent from industry, 14 per cent from buildings, 10 per cent from transport, and 6 per cent from agriculture, according to Ezekiel.
Carbon is also a potentially lucrative asset. The idea is that the gas will earn its value in Australia from the federal government's target to slash Co2 emissions by 60 per cent from 2000 levels by 2050.
Ezekiel said the global markets were organising a "potentially profound" price for carbon.
In May, the going rate in Australia was set at $19 a tonne when AGL sold Westpac the rights to emit 10,000 tonnes of the gas.
The future carbon market is being fuelled by economic growth and industrialisation.
The world is seeing a huge uptake of Co2 as economic growth in Asia fuels demand for new energy, said Ezekiel. Co2 emissions from power in China and India are forecast to increase 50 per cent by 2030, while emissions from transportation are expected to increase 60 per cent, he said.
Australia's close proximity to developing Asian countries will be an advantage as the global carbon market evolves and opportunities for investment arise.
Ezekiel also sees Australia having a crucial role in negotiating a global trading scheme.
As countries around the world start to develop a global cap and trade scheme, Ezekiel said Prime Minister Kevin Rudd will have the opportunity to use his close relationship with China to broker a deal between it and the United States, two of the world's largest emitters of Co2. "It's a very important role and if someone can pull it off then it's someone like him," he said.
In terms of investment opportunities, Ezekiel said Credit Suisse was seeing carbon as an explosive market with decent liquidity.
Credit Suisse has had a lot of interest from individuals wanting access to the market, he said.
However, he also said it was a difficult market for retail investors to access.
Another downside was that a lot of the projects were based in emerging markets.
However, the opportunities for investment in emerging technologies were profound, said Ezekiel, particularly carbon sequestration, which involves capturing Co2 gases emitted from factories, etc, and storing them under ground.
Ezekiel said there were global investment opportunities and venture money in energy efficient technologies renewable energies.
Currently, 21 per cent of global transmissions came from renewable energies and 15 per cent were produced by nuclear energy, which Ezekiel said was a relatively safe and clean energy. However, he said the world would see transmissions from nuclear energy decrease due to capital and regulatory constraints.
Australia could also have a role in developing and financing technologies to help China, India, and other developing countries as they attempt to industrialise while controlling Co2 emission increases.
These emerging opportunities could overshadow the damage to Australia's coal industry as it lost favour.
For a carbon market to work, Ezekiel said a "cap and trade" system needs to be designed. This system needs to cover the maximum range of greenhouse gases and industry sectors and it needs to have international linkages to be truly global. The system also needs to avoid over allocation of carbon credits, which would see them valued to low.
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