Features

A great opportunity in carbon credits

Carbon trading is one of the main ways in which we are trying to save the planet from climate change. But it also offers opportunities for investors to profit, says Tom Bulford.

It takes something special to make enemies of the USA, China and forty other countries around the world. But the EU has managed to do just that.

I'm talking about new plans by the EU to overhaul it's carbon credit scheme. I'm sure you've heard of it, and know that this is one of the main mechanisms by which we are trying to save the planet. The concept is quite simple.

Subscribe to MoneyWeek

Become a smarter, better informed investor with MoneyWeek.

Businesses that reduce their level of carbon emissions by, for instance, generating power from wind turbines or capturing and recycling noxious emissions, get carbon credits.

Dirty businesses like coal-fired power stations or cement works are obliged to buy carbon credits off the good guys. This transfer of wealth rewards 'clean' businesses and penalizes 'dirty' ones. It incentivises the reduction of carbon emissions, and the evidence suggests that it works.

Advertisement
Advertisement - Article continues below

In fact I think there are a number of very exciting penny shares in this field. Especially now that the sector has been almost completely written off.

The devastating collapse in carbon pricing

The EU's carbon trading scheme is in disarray. Just before Christmas a letter from the EU Corporate Leaders Group on Climate Change (Patron, Prince Charles) warned that without some action, it could be in serious jeopardy. The problem is that the price of a carbon credit has fallen so far that it is no longer disincentivising pollution.

The traded value of carbon credits halved in the second half of 2011. This reflects flaws in its initial design. The recession is hitting the output of the polluters, who therefore need fewer carbon credits. With their demand falling, the price of carbon credits has fallen as well but one reason why this could be about the change is the same as that which has provoked the wrath of the rest of the world.

The EU has decided that aeroplanes emit dangerous carbon and they should pay the penalty. They must give a full report on their emissions and buy carbon credits when these emissions are above a prescribed level. To make matters for the airlines worse and I rather like this aspect of the scheme the emissions of the entire journey will be measured, not just those made when in EU air space.

The EU has effectively levied a global airline tax

This has gone down like a lead balloon. China's four leading airlines have said that they will refuse to pay and China has dropped dark hints about future orders for Europe's Airbus. The Indian government will formally protest at the forthcoming India-EU summit in New Delhi next month. The US and Canada have lodged a petition, while Hillary Clinton has warned that unless the EU suspends the scheme and negotiates with other governments on how to limit airlines' CO2 emissions on a global basis, the US "will be compelled to take appropriate action" whatever that means.

Advertisement
Advertisement - Article continues below

Summing it up, Sanat Kaul, chairman of the International Foundation for Aviation and Development (so not biased, then) says that "Europe is marginalised on the issue, as the whole world is against the decision."

The whole world, that is, except me. Because I think it sounds rather a good idea.

A great opportunity in carbon credits

But I also think that it will help to redress the imbalance in the carbon credit market, something that is already of concern to the EU. Just before Christmas, in a move that went unnoticed by UK investors, EU politicians backed a proposal that would prop up carbon prices by withholding 1.4 billion permits from the third phase of its Emissions Trading Scheme. This immediately sent prices some 20% higher, and I believe should mark the bottom for carbon credit prices. Although the EU trading scheme accounts for about 97% of global traded emissions today, its dominance is set to be challenged by prospective new schemes in Australia, the USA and China.

So whether or not airlines are penalised, carbon trading is here to stay. It's set to become a global rather than an EU phenomenon. I think the stock market offers one great way to play this theme, and it is through a penny share that I have been following for some time. To read all about it, just get a copy of this month's Red Hot Penny Shares.

This article is taken from Tom Bulford's free twice-weekly small-cap investment email The Penny Sleuth.

Sign up to The Penny Sleuth here

Advertisement
Advertisement - Article continues below

Information in Penny Sleuth is for general information only and is not intended to be relied upon by individual readers in making (or not making) specific investment decisions. Penny Sleuth is an unregulated product published by MoneyWeek Ltd.

Advertisement

Recommended

Visit/503659/smooth-sailing-with-somero
Share tips

Somero: trading this overlooked bargain

Mechanical-screed maker Somero dominates its niche and is attractively valued. Matthew Partridge picks the best way to trade it.
26 Mar 2019
Visit/503293/vcts-eis-and-seis-tax-relief-for-brave-investors
Isas

VCTs, EIS and SEIS: tax relief for brave investors

If you can stomach the risk involved in backing a company in its early stages, consider VCTs, the EIS and the SEIS. Generous tax breaks are on offer.
15 Mar 2019
Visit/503055/how-to-find-big-profits-in-small-companies-2
Share tips

How to find big profits in small companies

The small- and micro-cap sectors are risky and volatile. But with careful research and patience, investors could make huge gains. Matthew Partridge ex…
7 Mar 2019

Most Popular

Visit/economy/inflation/600799/federal-reserve-inflation-money-printing
Inflation

Here’s why the Federal Reserve might print more money before 2020 is out

The Federal Reserve wants to allow US inflation to run “hot” for a while. But that’s just an excuse to keep interest rates low – and possibly print mo…
10 Feb 2020
Visit/investments/investment-strategy/600804/the-secret-to-avoiding-being-panicked-out-of-your-portfolio
Investment strategy

The secret to avoiding being panicked out of your portfolio

With the coronavirus continuing to occupy headlines, investors still aren’t sure how to react. But the one thing you mustn’t do is panic. Tim Price ex…
11 Feb 2020
Visit/economy/600796/money-minute-monday-10-february-lacklustre-growth-in-the-uk-and-europe
Economy

Money Minute Monday 10 February: lacklustre growth in the UK and Europe

Today's Money Minute looks ahead to the week's GDP growth estimates for the UK and the eurozone, plus inflation figures for the USA.
10 Feb 2020
Visit/investments/commodities/600729/the-rare-earth-metal-that-wont-be-a-secret-for-long
Sponsored

The rare earth metal that won't be a secret for long

SPONSORED CONTENT – You can’t keep a good thing hidden forever; now is the time to consider Pensana Rare Earths and the rare earth metals NdPr.
31 Jan 2020