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Carbon credits: Safe haven?

Johannesburg - Over the last six months, the carbon market has outperformed traditional safe havens such as gold while investors have been consumed by financial market turmoil in the US.

"Carbon credits on both the primary projects and secondary markets in Europe have outperformed all asset classes, including hard commodities such as gold," said Gregor Paterson-Jones of Sterling Waterford.

Sterling Waterford is a niche market financial services firm which brought the first-ever carbon credit note to the South African market in the last few years. The first tranche of the instrument expired earlier in 2008, with investors enjoying a 250% return over the life of the instrument.

The carbon credit note is an instrument that allows South African investors to invest in the lucrative carbon credit market and enjoy the rand hedge characteristics of the instrument, without affecting their offshore allowances.

The carbon credit market is driven by demand for credits which place a price on carbon emissions by major firms in both the developed and developing world. In essence, a price has been placed on pollution.

Over the last few months, investors have seen global stock markets routed as the US and Europe have been gripped by panic selling. Many exchanges have seen heavy-weight (blue chip) stocks lose between 30-60% of their value.

Traditionally in times of uncertainty, investors have flocked to gold bullion as the investment safe haven. But despite a brief visit to the $1 000 level in March 2008 gold has failed to sparkle, hovering between the $850 and $950 mark.

According to Paterson-Jones, the carbon market has held up far better over the last few months.

Point Carbon, an Oslo-based carbon market intelligence company, said in a recent report to investors that they predict a relatively short supply of certified emission reductions issued through the clean development mechanism programme as well as the joint implementation scheme's emission reduction units by the end of 2012, when the Kyoto Protocol agreement, which created the two systems, expires.

They believe that this will translate into steady demand for carbon instruments.

Individual investors nibble

Sterling Waterford began the marketing of its second tranche of the carbon credit note in September.

One of the key features of this second issue was greater liquidity of the instrument. At the time Paterson-Jones predicted that non-institutional investors would see more interest in the product.

With investor appetite slowing, Sterling Waterford extended the listing process by an additional two-and-a-half weeks.

Paterson-Jones told Fin24.com on Wednesday: "We have seen many more individual investors showing interest in the instrument; many of these do not have brokerage accounts and as a result the processing of their applications has taken slightly longer to accommodate for FICA requirements."

About two million notes have been placed to date.

For investors looking for a safe haven from economic turmoil, Paterson-Jones said: "Analysts are confident that the while the economic slowdown will affect the supply side and potentially push up the price of carbon, the demand side has experienced little change even in the face of severe economic downturn."

- Fin24.com

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