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Ultimately companies are being held accountable for their carbon emissions and a physical price is being placed on the damage companies are doing to the environment. As a result, these carbon credits are now becoming either an asset or a liability on company balance sheets.
Three years ago Sterling Waterford announced the listing of its carbon credit note (JSE ticker: CBN) on the JSE.
This product was the only way that South Africans could participate locally in the global carbon credits market.
"We believe this product has been a success in that it proved to be an 'investable' asset class and generated healthy returns for investors, said Gregor Paterson-Jones,CEO of Sterling Waterford.
Paterson-Jones says that the majority of investors purchased the note prior to listing at a price of around R54.
At maturity the investors were paid out R190 which equated to a return of about 250% over a three-year period. The product is US dollar-denominated and then converted back to rands, making it a good hedge.
Traders who had looked at the instrument complained about the lack of liquidity in the market which had detracted from them adding it to their portfolio.
Paterson-Jones agreed, saying that this issue was further compounded when the larger holders made offers to purchase from the minorities. "When the instrument matured there were pretty much only four large holders," he said.
The company is now looking at issuing a similar product in August this year; however, they are planning to offer it with a larger market capitalisation.
While there is a lot of interest in the carbon market there are still many potential issues that plague this market.
Rapidly developing industrial countries such as China and India, as well as the USA, have avoided mandatory "capping" of their emissions.
A "capped" country may perceive itself to be trading at a disadvantage to a country that has no limit on their emissions.
An "artificial" market is almost created in terms of the pricing of carbon credits - if the limits were removed, this would seriously impact on the demand side of the market.
The global economy is grappling with ways to manage emissions and encourage more "clean" energy projects; the carbon credit market is one of the few ways in which countries and their industries can currently be held accountable.
The asset class is one of the fastest-growing in the world and invariably South Africans traders and investors are going to want to find ways to participate.
- Fin24.com
