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Opalesque Exclusive: Carbon and emissions trading in Europe, Part Two - Some foresee a perfect storm and carbon challenges for the energy sector, Climate change revisited

Posted on 30 June 2009

Benedicte Gravrand, Opalesque London: Following yesterday’s Part One - How the Europeans do it: Source.

Two of the financial groups that bet on climate change are in focus today; one foresees a price hike in emissions allowances in the near future, the other bets on oil and gas firms that are prepared for the forthcoming low-carbon economy.

Akur Partners sees the silver lining in an approaching perfect storm Tom Frost, who has a PhD in Climate Change and who is a founding partner at Akur Parners, a new finance and equity capital markets advisory firm based in London, wrote an interesting presentation on the carbon markets in Europe, forecasting a ‘perfect storm’ (an analogy for an event where a combination of circumstances will aggravate a situation drastically.)

The EU Emissions Trading Scheme (ETS) is the world’s most advanced and far reaching market designed to tackle climate change, he notes. It is intended to give industry (which must participate) flexibility and control to choose how to meet emissions reductions targets, whether through investment or the trading of emissions allowances. Currently worth over Eur20bn, it is lightly regulated and in its infancy.

During ETS’ Phase I (2005-07), the EU over-supplied emissions allowance - bringing prices down to zero. In the current Phase II (2008-12), it is under-supplying it. Frost believes that a significant supply squeeze could impact the EU market before the end of the current phase. As distressed buyers of emissions allowances come to the market simultaneously, prices may spike to high levels - and this could be a golden opportunity for financial investors.

Akur’s quant model forecasts EUA price of Eur64 by 2012 - from Eur10 Akur Partners’ new EU emissions Allowance (EUA) pricing model seeks to find the fundamental price point for an emissions allowance traded on the EU ETS. It attempts to take into account feedback mechanisms likely to impact the supply of carbon credits to the scheme, and the impact of banking and borrowing allowances.

Akur’s base case scenario sees a potential EUA price of Eur64 ($90) toward the end of the current phase of the scheme (including weak speculator activity), versus the current market price of c.Eur10. An upside case examines the potential impact of strong speculator activity and sees the potential for the Eur100/EUA price ceiling to be tested.

An explanation of AKUR’s ‘perfect storm’ is in the firm’s recent presentation ‘The carbon markets - Europe’s perfect storm is brewing‘ which can be found here: Source.

Climate change - revisited The greenhouse effect is the mechanism by which the planet’s surface temperature is kept warm and regulated by the atmosphere. Gases in the atmosphere act as panes of glass, insulating the planet. Man-made emissions have amplified this natural effect - resulting in global warming, the general average warming of the planet - as a result of which, climate change occurs. Examples of climate change include increased rainfall, extreme weather events, drought, higher temperatures (and lower temperature in some places as ocean circulatory patterns change).

According to charts Tom Frost gave out in a presentation in London last month, levels of Carbon Dioxide (CO2), Methane (CH4) and Nitrous Oxide (N2O), as well as temperature, have all risen significantly since the 1800s, when the industrial revolution started - compared to the previous 800 years during which levels were steady.

These three major greenhouse gases make up for less than 0.04% of the total volume of the atmosphere - but the majority of the warming impact on the planet is from these three gases. Frost adds t………………….

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