Carbon credit market hit by UN crackdown

By Ben Bland
Last Updated: 12:47am BST 14/07/2008

Chaos theory is often explained in terms of the "butterfly effect", whereby an insect flaps its wings on one side of the world and causes a tornado on the other.

Cows produce methane, a potent greenhouse gas
At first glance, the global carbon market seems like a pastiche of this model - when a cow farts in Brazil, Britain somehow moves nearer to meeting its requirement to cut emissions under the Kyoto Protocol.
Unlike chaos theory, this process can be explained reasonably simply: The cow fart is captured and put through a bio-digester, which converts the methane into bio-gas, which can be used to meet everyday energy needs.
This reduces carbon emissions in Brazil and allows the project operator to sell a carbon credit on to a manufacturer in Britain that has exceeded its carbon allowance.
However, as it grew rapidly over the past couple of years, the nascent carbon offset market became too chaotic for the UN, which has started taking a more stringent view on the projects it allows to produce official carbon credits - known as Certified Emission Reductions (CERs).

The key criteria for the UN officials operating the so-called Clean Development Mechanism is that projects must do something to combat climate change that wouldn't have happened without the added incentive of selling CERs.
Otherwise profiteers would be given a blank cheque to squeeze extra cash from projects that were going to be developed anyway, with no net environmental benefit.
This crackdown has hit early movers in the carbon credit business - such as EcoSecurities, Camco and AgCert - in two ways.
Firstly, some of their projects (which range from Brazilian cow fart capture to Chinese hydroelectric dams) have not been certified. Secondly, there have been long delays in the approval process because of the large backlog of projects the UN is trying to verify.
AgCert was forced into examinership (the Irish equivalent of administration) in April after running short of cash and EcoSecurities and Camco, which have seen their shares tumble (see graph), both delivered disappointing updates to the market last week.
The major concern for these carbon credit firms, as for any early-stage company, is that they run out of cash before they can start turning a regular profit.
"The reason that everyone is in trouble and blaming the UN is that there's a growing fear that they're running out of money," claimed one industry source. "Once the market thinks they need a refinancing, the shares tank in expectation."

But while the carbon credit producers have been struggling, Climate Exchange, which owns the European and Chicago carbon exchanges, has seen its share price surge by more than 500pc over the past two years.
The dramatic rise of Climate Exchange, which has become one of the 10 biggest companies on Aim, has prompted some sceptical investors to question its fundamentals.
Although Climate Exchange views itself more as commodity exchange than any sort of green business, it still faces the same challenges as other developmental companies.
The intense hype surrounding the global carbon market - which was worth £30bn in the first half of this year alone and is forecast to grow to trillions of pounds over the next 10 years - has benefited Climate Exchange, which operates the leading markets for carbon trading in Europe and the US.
However, the company, which generates its revenue from trading and membership fees, is yet to produce a profit.
Climate Exchange, which has a market capitalisation of more than £800m, made a pre-tax loss of £8.3m on revenues of just £13.8m in 2007. It trades on a staggering 2009 price/earnings ratio of 116, according to forecasts from Morgan Stanley that are based on a move into profitability next year.
That's in stark contrast to an average 2007 P/E ratio of 26 for global exchange stocks and an average 2009 forecast P/E of 18.
One of the reasons that Climate Exchange is trading on such a high multiple is the hope that it will be taken over by one of the large US commodities exchanges, such as the IntercontinentalExchange or NYMEX.
However, any predators are unlikely to move at this kind of valuation, especially in this troubled market.