Monday, January 31, 2005

Investing in Virtual CO2

Fiona Harvey writes on an interesting new fund launch by French bank CDC Ixis in last Monday's FT fund management section. Turning commodities into securities is always interesting. Personally, I wouldn't buy into this, as I think that the returns would be just as cyclical as holding other industrial commodities. Neither am I pessimistic about the prospects for the private sector to cut CO2 emissions given the imperative to cut costs by husbanding increasingly expensive energy.

One of the first carbon funds allowing investors to gain access to the European market in trading carbon dioxide has received regulatory approval.

The European Carbon Fund was approved by Luxembourg and will buy and manage carbon dioxide emission rights in the market that has grown out of the European Union's greenhouse gas emission trading scheme. This is designed to lower emissions from European industry in line with the UN-brokered Kyoto protocol on climate change.

Under the trading scheme, a mandatory limit is placed on the amount of carbon dioxide that companies in certain energy-intensive industries are allowed to emit. If they want to emit more than their allowance, they must buy emission rights in the market, or face heavy fines. Companies that produce less than their allowance can sell their excess rights.

The new eight-year fund comes from the French investment bank Ixis, part of the Groupe Caisse d'Epargne. Its target size is Euros 100m (Pounds 69.24m), of which Euros 40m has already come from Caisse des Depots and Fortis Bank, the two sponsors of the fund. Laurent Segalen, director of investment funds at Ixis, said a further Euros 20m had been pledged from other sources.

A variety of banks had been researching carbon trading, while hedge funds were beginning to show an interest. "But they still see carbon as exotic," he acknowledged.

The success of the EU's scheme, and the new fund, will depend on carbon scarcity in the market, which will encourage companies to reduce emissions. There have been concerns that some EU governments have been too generous in allocating allowances to their industries, in an attempt to gain a competitive advantage.

However, the European Commission is expected to demand tougher targets from 2008, when more industries will be brought under the scheme. Ixis calculates that in this second stage there will be a shortage of 60m to 100m tonnes of carbon dioxide per year, forcing many companies to buy extra emission rights.

Fund subscriptions will close on March 31. Ixis will hold a roadshow in London on February 9.