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Post-2012 climate deal delay ‘rocks confidence’ – investors
18 November, 2009
Statements from US President Barack Obama and Chinese President Hu Jintao that a legally binding climate deal is unlikely to be struck at Copenhagen next month has rocked confidence in the global carbon markets, investors have told Carbon Finance.
As world leaders instead eye a “comprehensive political agreement” as the likely outcome for the UN talks – with a full treaty to follow in 2010 – investors are holding back on entering the market until there is more certainty on the post-2012 outcome.
Few in the investor community are surprised by the likelihood of limited progress at Copenhagen, said David Costa-D’sa, head of environmental financial products structuring at Deutsche Bank in London. “People saw it coming. But it does rock confidence ... and postpones participation for a large sector of the market.”
“Let’s not pretend it doesn’t matter,” said James Cameron, vice-chairman of carbon asset management firm Climate Change Capital. “It clearly matters, whether you have a legally binding agreement or not.”
Gus Hochschild, equity analyst at Mirabaud Securities in London, said that there had been growing interest in the carbon market from investors as the market has matured, “but many are stepping back, as the carbon markets continue to slip from one banana peel to another, with the last being the political masters now agreeing that it will be all right not to agree to a legally binding climate change agreement in Copenhagen next month.”
The lack of clarity on post-2012 “is putting a crimp in the market”, added Andrei Marcu, Geneva-based head of business development and regulatory affairs at Mercuria Trading. “It is clearly creating a lot of uncertainty.”
Part of the delay is due to the US Senate having yet to pass its climate legislation, which is hampering what the country’s negotiators can commit to internationally. “One of the US arguments for months is its domestic obligation,” Cameron said. “It wants to get its domestic legislation in place and build from there.
“From an investor’s point of view, it doesn’t matter where the demand is created, as long as it is created. [But] it’s still better to have a global emissions trading scheme rather than a patchwork of domestic ones.”
However, neither Cameron nor Costa-D’sa thinks a delay will cause long-term damage to the sector.
“You won’t see permanent damage to the investor community,” said Costa-D’sa. “But they do need some form of signal soon; the key is what arrives, and when it arrives.”
“You’d love it to be clearer, of course,” added Cameron. “But it’s also the case that where there is uncertainty and work to be done to create a range of assets for investors, you also have opportunity to produce superior returns, providing you can take that risk.”
“We think it’s an opportunity – in the air of uncertainty, there is money to be made,” Marcu said.
But Marcu added that Copenhagen will provide clarity on certain key issues, such as pre-2012 adaptation funding, technology transfer, new mechanisms for generating carbon credits – including frameworks for reducing emissions from deforestation and degradation and carbon capture and storage – and on a transition period to protect existing investments.
“If we get all this, plus improvements to the Clean Development Mechanism, and maybe some emission reduction targets – even if they are more modest than some would want – and a solid mandate to come back with a legally binding agreement in six months time, that’s not a bad package,” he said.
