Ever since the implementation of phase one of the Kyoto Protocol, the right to release CO2 into the air has become commodified. In Europe alone, there were 24 billion dollars worth of CO2 deals; indicating a booming trend.
Traditional banks and brokerages have been relatively quick to follow suit, albeit with mixed success. For one, the dynamics of the CO2 market are not as straightforward as they are in other markets. CO2 prices have been volatile, arguably for the reason that these markets are not by definition efficient and mature. One major factor in CO2 pricing is weather; when the cold sets in, energy consumption goes up, and with it the need for emission rights.
The mild winter resulted in lower energy consumption, which in turn resulted in both lower energy and CO2 emission prices. CO2 prices are actually fairly correlated to a basket of fuel indexes such as Coal, Oil, Gas, etc. The relationship between coal consumption and CO2 is one of the strongest, as it produces the most CO2, thus requiring more emission rights. With Kyoto in place, there is finally a financial incentive to move towards reducing CO2 emissions. Furthermore, with CO2 pricing, there is a benchmark that can be used to calculate returns on investing in alternatives that reduce the overall CO2 emissions exposure.
There remain some issues to be worked out; notably the pricing of emission contracts remains a tricky endeavor. Part of the problem lies in the fact that the CO2 trading platform remains a young market in its adolescence, meaning there remain considerable arbitrage opportunities. Academically and professionally there is no real simple uniform pricing model for CO2 emission in the way that the financial world has embraced the Black & Scholes option pricing model or the Capital Asset Pricing Model.
Other factors bringing uncertainty to the whole affair (excluding energy dynamics) are the different political organs and processes that determine the emission ceilings of different countries. When emission ceilings move arbitrarily - for the most part downward - this creates much volatility in the market. With CO2 allowances set to tighten in Europe as we move towards phase 2 of the Kyoto Protocol, it is expected that prices are set to rise once again. Looking at the future, there is definitively money to made from hot air and, in doing so, arguably stemming global warming.
Kyoto opponents, for whatever reason or motivation, may laugh at the whole "pseudo" CO2 market phenomenon. Nevertheless, its significance (aside from scientific debate on global warming) can by no means be ignored. Non-Kyoto signatory countries are going to face significant pressure in the near future. French President Chirac was already bold enough to suggest putting an import tax on countries that have not signed Kyoto. This sends a clear message to the U.S., Australia and China, who, even without signing and accepting environmental responsibility, will face a steep price to pay for their environmental desecration.
Traditional banks and brokerages have been relatively quick to follow suit, albeit with mixed success. For one, the dynamics of the CO2 market are not as straightforward as they are in other markets. CO2 prices have been volatile, arguably for the reason that these markets are not by definition efficient and mature. One major factor in CO2 pricing is weather; when the cold sets in, energy consumption goes up, and with it the need for emission rights.
The mild winter resulted in lower energy consumption, which in turn resulted in both lower energy and CO2 emission prices. CO2 prices are actually fairly correlated to a basket of fuel indexes such as Coal, Oil, Gas, etc. The relationship between coal consumption and CO2 is one of the strongest, as it produces the most CO2, thus requiring more emission rights. With Kyoto in place, there is finally a financial incentive to move towards reducing CO2 emissions. Furthermore, with CO2 pricing, there is a benchmark that can be used to calculate returns on investing in alternatives that reduce the overall CO2 emissions exposure.
There remain some issues to be worked out; notably the pricing of emission contracts remains a tricky endeavor. Part of the problem lies in the fact that the CO2 trading platform remains a young market in its adolescence, meaning there remain considerable arbitrage opportunities. Academically and professionally there is no real simple uniform pricing model for CO2 emission in the way that the financial world has embraced the Black & Scholes option pricing model or the Capital Asset Pricing Model.
Other factors bringing uncertainty to the whole affair (excluding energy dynamics) are the different political organs and processes that determine the emission ceilings of different countries. When emission ceilings move arbitrarily - for the most part downward - this creates much volatility in the market. With CO2 allowances set to tighten in Europe as we move towards phase 2 of the Kyoto Protocol, it is expected that prices are set to rise once again. Looking at the future, there is definitively money to made from hot air and, in doing so, arguably stemming global warming.
Kyoto opponents, for whatever reason or motivation, may laugh at the whole "pseudo" CO2 market phenomenon. Nevertheless, its significance (aside from scientific debate on global warming) can by no means be ignored. Non-Kyoto signatory countries are going to face significant pressure in the near future. French President Chirac was already bold enough to suggest putting an import tax on countries that have not signed Kyoto. This sends a clear message to the U.S., Australia and China, who, even without signing and accepting environmental responsibility, will face a steep price to pay for their environmental desecration.
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