Will the Stock Market Hurt the Emissions Market?

There is so much bad news spinning out of the financial markets these days that it might be hard to spare a few moments for carbon trading markets. But the dramatic freezing up of credit around the world may threaten to spill over into the nascent market for trading carbon emissions, with potential further consequences for the global climate. Or that is at least an idea that is beginning to emerge this week.

A commentator for Reuters argued that any initial expectations that money looking for a safe haven from the stock market in the carbon markets ought to be abandoned for now. The market’s lack of history and its complex framework are making investors balk, according to some of those interviewed.

“The market is uncorrelated with equities. That may make it a safe haven, but people are not rushing into it because the technical barrier is too high,” said Frederic Brodach, portfolio management director of Dexia Carbon Fund Managers.

“The carbon market is just as risky as the turmoil going on in equities. It’s new, people don’t fully understand it, and there’s a lot of political risk,” said Trevor Sikorski, carbon analyst at Barclays Capital.

The overall emissions-trading market, valued at $13 billion, allows large companies to invest in clean energy projects in exchange for offset credits they could either put toward emission targets or trade on the market.

As Ken Silverstein of EnergyBiz Insider noted:

Burgeoning carbon markets are among the first trading segments to feel the financial disorder. Right after Lehman Brothers announced it was declaring bankruptcy and closed its carbon trading operations, the price of European carbon futures is reported to have fallen 4 percent….

While the dip is probably temporary, the goal is to get the price higher — all to create a threshold whereby companies have less incentive to release carbon emissions. Installing environmental controls, for example, might be cheaper than buying carbon credits.

A collapse of the emissions market like we’re seeing with equities seems unlikely. But the consensus seems to be that it will neither benefit from stock outflows and may even slow down at a time of important growth. That might in turn complicate efforts among large companies to curb their own emissions in the tough economic times that seem to lie ahead.