Investors interested in carbon investment opportunities, or carbon investment projects must first evaluate their priorities in terms of time scale and risk. As in other commodity markets carbon investment opportunities lie in spot trading, futures trading and entry level investment in projects which will generate carbon credits. Carbon investment projects are available both to larger institutional investors, carbon investment opportunities in projects also can offer retail options for smaller private investors.
We have at any one time a choice of potential carbon credit projects for investors. Each project has gone through the necessary due diligence and is ratified and approved by the appropriate national and international bodies.
In general there are two fundamental approaches to investment in carbon credits. Primary and Secondary.
The primary market refers to the initial transaction between the project developer and the investor. It is the transaction that carries the CER, the commodity in question, from the project in the developing country to the international market.
The contract to transfer ownership of a CER from seller to buyer is known as an Emissions Reduction Purchase Agreement (ERPA). As the initial CDM contract is much like project finance, ERPAs vary from case to case. Typically, however, the price agreed in most primary ERPAs is a function of the apportionment of the various risks inherent in generating a CER and delivering it to the buyer, as well as contractual issues.
The secondary market refers to any further transaction after the primary transaction: the onward sale of the CER until eventually it is bought by the final consumer who will submit it to meet their target. Typically, the buyer in the secondary market (secondary CERs) carries much less risk as the CER is either already in existence, or its delivery is guaranteed in some way with replacement or compensation for non-delivery written into the contract. As a result, the buyer pays much more for the secondary CER.
The buyers for this more expensive, low-risk secondary CER tend to be European companies that face their specific target under the EU ETS. The secondary CER market has grown up as an offshoot of the EU emissions trading scheme and prices are often quoted as a percentage of the price of EUAs.
Entry Level and Next Steps
Minimum entry investments vary from project to project but typically start at 3000-4000 GBP.
As with any investment in a new market, the first step is to become familiar and comfortable with the product and market. Our consultants' job is to provide you with the resources and advice you need to understand carbon credit trading as an investment opportunity.
As with any investment, different investors have varying priorities and requirements. Again, our consultants will suggest the relevant project, or portfolio of projects, based on what yours are, or, if you are unsure, help you to decide on them.