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Carbon markets: Hot times for emissions trading

Banks have come to realize that to make money from emissions trading markets they would do well to tie up with the consultants that understand the technicalities and with the corporates that own Clean Development Mechanism schemes. Peter Koh reports.

Green finance special section

EXCITEMENT ABOUT THE market for greenhouse gases is rising even faster than global temperatures. Investment banks that are already active in the market are doubling their teams, while those that aren’t are quickly trying to build them. But although there is a compelling need for some banks to be present in the market to serve existing clients, and the opportunities are attractive, so far most of the real money is being made by other types of participants.

The non-financial technicalities of emission reduction projects, which generate tradable certified emission reduction certificates (CERs), and the lack of regulatory clarity in what is essentially a market created by regulation, is encouraging more and more banks, especially those late to the game, to seek equity stakes or partnerships as a means of gaining expertise.

The market for greenhouse gases has directly created three main areas of business opportunity: the financing and development of carbon offsetting projects; the trading and risk management of emissions allowances and CERs; and speculative investing. Of these, the biggest money-spinner to date has been the first. Banks, however, have largely been missing out on the action, which instead has gone to the corporates that own the projects and to the market’s pioneering consulting firms, which are increasingly morphing into what look like funds themselves.

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