Voluntary carbon credits make a very poor investment. Nevertheless, there are many companies selling voluntary carbon credits to the public as investments and (unfortunately) many people buying them.
Of course, you shouldn’t just take my word for this. After all, I’m critical of carbon trading. But when the Insolvency Service describes them as a “wholly unsuitable for investment by the public”, or a judge describes them as “not a suitable investment at all as they were a wasting asset unlikely ever to be profitable”, or when the Financial Services Authority puts out warnings against investing in carbon credits, or the National Fraud Intelligence Bureau states that, “If you buy carbon credits you WILL NOT make any money no matter what the salesman says”, then maybe, just maybe, you should start paying attention.
Last week’s prison sentences for two men involved in a boiler room carbon credit scam should help strengthen the argument against investing in voluntary carbon credits.
And when a high-level carbon trader explains at length why voluntary carbon credits are not a suitable investment for the public, that really should be the end of the discussion. Last year, Andrew Ager gave a presentation to the City of London Police. From December 2008 to April 2012, Ager was Head of Carbon and Emissions at Jeffries Bache, a subsidiary of Jefferies Group, a global investment banking firm.
Here are some of the highlights of Ager’s presentation:
- “You would only buy voluntary carbon credits to offset your carbon foot print. There is no other economic reason.”
- “It’s been reported that individuals have paid £5 to £15 for voluntary credits in some cases from large hydrological projects, which in reality if any one of you here decided that they wanted to offset their household emissions, you could legitimately buy for less than 50 pence.”
- “Individuals buying voluntary credits other than to offset their emissions will most probably find that they are unable to sell the credits at all and if they do it will be for a tiny fraction of the price they paid.”
- “No genuine company, none of the dozen or so companies that are involved in this market, would cold call individuals offering opportunities to invest in the voluntary market.”
Ager’s presentation looks at carbon markets in detail. The whole presentation is available on the City of London Police website and it’s well worth watching the whole thing. Click on the image below for the part of Ager’s presentation about voluntary carbon credits.
Below is a transcript of part of this presentation, starting at 6:24.
Carbon Markets: Understanding new and emerging threats
Presentation to the City of London Police, by Andrew Ager, Head of Carbon and Emissions at Jeffries Bache, 3 May 2012
Part 4: The Voluntary Carbon Market
The voluntary market remains completely and utterly unregulated. There are no regulations. It is not traded, despite what you may hear, on regulated exchanges at this time. There are several, what are called independent registries that hold voluntary carbon credits and they facilitate buyers and sellers.
In many ways it’s a similar operation to Ebay, where you go online, Ebay has a structure where a seller can list a product and a buyer can come on and browse and choose to either bid or choose to buy the goods that are on offer. These are not regulated, they are called registries, but in fact they are an electronic database.
Another important thing is that voluntary certificates are not actively traded. In the regulated carbon market, there is a significant volume traded every day. People buying and selling, whether they be speculators, whether they be investors, they are in and out of the market on a day to day basis.
The voluntary market, again, is very much like, similar to Ebay. You would not go onto Ebay and decide to buy 10,000 watering cans and then go back on the next day to see if you can get more money for them. It is a consumption website. These registries are really for the consumer to buy, to purchase and to retire. To consume those credits. So if a company has gone through the process of doing its due diligence and has decided to offset its carbon emissions, it chooses, browses through one of these registries, chooses a voluntary carbon credit, buys it and then retires it.
There is a process on these registries where you can buy and they are effectively deleted, they are removed from the system, but they can be held in an account where if you want to show your customers, your clients that you’ve done this, they can log on and they can see it there in a retirement account. But you have gone and purchased this and you have offset your emissions and these credits are retired.
Genuine buyers of voluntary carbon credits will only deal with reputable and recognised sellers. There are probably a dozen or more recognised, industry recognised companies that have an exposure or involvement in the voluntary market. Genuine buyers will only buy from them. They will not buy from private individuals, because it is a long process for a large corporation that decides to offset their emissions to actually go out and go through the process of picking a particular project that its looking for, carrying out the due diligence. There are a lot of legal terms, indemnities etc., that need to be signed.
And you can understand this because there was recently a media case where an electricity generator in the regulated scheme, decided to invest in a CDM project that was just starting, I believe it was in South America, and by investing in a project when it starts, you can actually generate those credits far cheaper than buying them on the market. So this company got involved and said yes we’re going to invest in this project to generate these credits. As the project evolved, it was found that the people who were removed or rehoused to take part for this project to be undertaken, may not have been removed of their own free will. Not only may they not have been removed of their own free will, some of them were missing.
So you can understand that there is a significant risk when investing in carbon offsets for a company’s compliance whether it be part of the regulated scheme or whether it be voluntarily. No company wants to do the right thing and offset their emissions and suddenly find out that they have an absolute and utter PR nightmare. That they’ve invested in credits that have problems or issues with them that could cause damage to the company. It is not a question of just phoning up and buying voluntary credits of off somebody, it takes a long process.
You would only buy voluntary carbon credits to offset your carbon foot print. There is no other economic reason. That’s quite important. As we stand, there is no other economic reason to buy voluntary credits other than if you are deciding to offset your carbon footprint as a company, you’ve decided to do this voluntarily.
Now. It appears that the criminal activity that we’ve seen in the regulated market may have moved on to the voluntary market.
There has been a significant surge in companies and websites offering ‘excellent’ investment opportunities or opportunities on their own in the growing carbon market. On closer inspection, when you look through these sites they are offering to sell voluntary credits.
Now often these sites will talk about the regulated market. The first part of this presentation. Kyoto. The CDM. Companies legally required to buy carbon credits. Well you now know that this is true. There are companies that are required to buy legally carbon credits.
But not voluntary credits.
Often you will see wonderful glossy pictures of projects in developing countries, it could be hydrological [sic] project in India, saying that you’re investing in this project and that you’re giving money to help the environment. They often have, and in some cases I’ve seen details of projects that have CDM, clean development mechanism, are registered with the CDM. So it looks as though these credits are part of the regulated scheme. When you look closely you see that they are actually voluntary certificates, which can be issued to a CDM project for the period before it was registered.
So if you build a wind farm, it’s up and running and you want to register it to receive credits from the United Nations CDM, clean development mechanism, that takes potentially a year to go through the red tape process, but obviously that wind farm’s working for a year. What you can then do is actually get voluntary certificates issued for the year before it was registered.
Most of these sites talk about the expanding carbon market. You often see quotes about the market being US$3 trillion, the world’s biggest growing market. Interesting, when you look closely, none of these quotes are actually dated. Many of these quotes are actually true, but they were made pre-2008, when as we all know, globally, the economy, markets etc., the outlook was very, very different.
And most of these quotes that you will see from various large institutions, or trading houses, are referring to the regulated market, not the voluntary market.
It’s been reported that individuals have paid £5 to £15 for voluntary credits in some cases from large hydrological projects, which in reality if any one of you here decided that they wanted to offset their household emissions, you could legitimately buy for less than 50 pence.
Individuals buying voluntary credits other than to offset their emissions will most probably find that they are unable to sell the credits at all and if they do it will be for a tiny fraction of the price they paid.
No genuine company, none of the dozen or so companies that are involved in this market, would cold call individuals offering opportunities to invest in the voluntary market.
The FSA are constantly updating their lists of unauthorised companies doing business in the UK and a not insignificant number are attempting to sell voluntary carbon credits.
Buyers are therefore not covered by the Financial Services Compensation Scheme.
Here I have a copy that you can see on the FSA website of an alert that they have placed. It’s structured, it gives the name of the company and it says that they are not authorised under the Financial Services Act 2000. And that individuals buying from them are not covered under the compensation scheme. So at the end of the day, if you buy something that has little or no value you cannot claim compensation under FSA compensation scheme.
We have a nice summary here of what you can do and you can’t do with these credits. The regulated market versus the voluntary market. The regulated credits: the EUAs, European Union Allowances; CERs, certified emissions reductions; ERUs [Emission Reduction Unit], I told you there was a lot of acronyms it could almost send you into a trance.
On the left hand side you can see, can EUAs, CERs, ERUs be used for compliance? Yes they can. There are restrictions on the amount of CERs and ERUs but that’s a more in-depth presentation.
Are they traded on a regulated exchange? Yes, they are traded on regulated exchanges for the most part. In fact, for the majority.
Is there a published exchange settlement price? Yes. If its traded on a regulated exchange, one of the conditions is there must be an exchange settlement price at the end of the trading day.
Is it a liquid market in the regulated market? Yes it is. At one point last year , the actual notional value of carbon credits held on the Intercontinental Exchange briefly made carbon the single largest commodity in Europe. It was bigger than Brent Crude Oil.
Is there a regulated registry system. Yes there is as we’ve seen you have a regulatory system that requires MiFID [Market in Financial Instruments Directive] and beyond.
When you look at voluntary credits: VCS, voluntary carbon standard; VERs, voluntary emissions reductions; GS, Gold Standard; VERs. Can they be used for compliance? No.
Are they traded on regulated exchanges? No.
Do they have a published exchange settlement price? No. There are no prices on any of the registry systems that hold them. There are brokers out there that do trade these, but again, these deals take months and months to do and often the prices that are quoted are very, very wide. So the bid offer is spread. For instance, large hydrological certificates from a large hydrological project can range from 50 cents to US$1.50.
Is it a liquid market? No. One of my collegues is considered one of the, well I suppose one of the initial entries into the voluntary market, and I remember about two years ago he did three trades all year. It takes a long time to negotiate these types of trades, as mentioned, when large corporations are buying these certificates there’s a lot of due diligence, a lot of work, a lot of documentation, a lot of legal to go through. So unlike the regulated market where there’s trading on a regular basis, every single day there’s a turnover, on average it’s about 20 million tons a day traded on the Intercontinental Exchange. When you add the other markets, the other exchanges it’s about 30 to 40 million tons of carbon is traded every single day. When you look at the regulated [sic] market, I’d be surprised if it’s 40,000 tons a day.