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Carbon uncertainty clearing up

Created:
7 August 2008
Written by:
Graeme Davies

One of the last major uncertainties in the world of carbon trading is close to being lifted, with news that the carbon credit registries of the EU and UN are finally able to communicate with each other, and clearing of credits issued by the UN and sold into the EU system should begin in earnest later this yearshould begin in earnest later this yearshould begin in earnest later this year.

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This is most significant for carbon credit portfolio builders such as Trading Emissions, Camco International and EcoSecurities. These companies were beginning to get edgy about their ability to crystalise the value in their portfolios, as credits created in the developing world under the auspices of the UN system, which had been promised on forward contracts to polluters in the EU, were effectively road-blocked by the lack of communication between the two registries.

Freeing up this blockage means these companies can now operate from a position of certainty that cash flows are going to start coming in, probably from the end of this year, if not earlier. More importantly, such companies can now begin to demonstrate the value they have built up in their portfolios.

After some precipitous falls in share prices in the sector, aided and abetted by the collapse of Agcert and a profit warning from EcoSecurities last year, investor confidence may finally begin to return.

The nascent nature of the carbon markets has been reflected by investor wariness towards companies operating therein, and the only true beneficiary of the market's growth so far is Climate Exchange, the operator of the European and Chicago carbon exchanges, whose shares have surged from 220p at their float in 2004 to 1924p now, on the back of strong growth in volumes of carbon credits traded.

IC VIEW:

Buy

With the uncertainty over the registries clearing up, Camco, EcoSecurities and Trading Emissions should attract more investor interest. Our favourite play in the sector remains Trading Emissions, which we recommended buying just under a year ago (135p, 31 August 2007) due to its discount to published net asset value.Camco and EcoSecurities look good value at 43.75p and 57p respectively. Climate Exchange remains most at risk to any shock in the carbon market, but no longer sufficiently so to rate it an outright sell.

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