The carbon credits trading industry is set to get a fillip with the launch of a new ratings agency yesterday in London by Sir Nicholas Stern, the acclaimed author of the UK's Stern report on climate change.
Lord Stern, the former World Bank chief economist whose landmark report on the economics of climate change warned the world risked plunging into economic depression if action was not taken urgently on greenhouse gases, said carbon trading was a "key plank" in dealing with climate change. The 700-page report released on 30 October 2006 for the British government, discusses the effect of climate change and global warming on the world economy. Although not the first economic report on global warming, it is significant as the largest and most widely known and discussed report of its kind.
"If we are to attract the levels of finance necessary to make this a mainstream market and have a strong impact on emissions reduction, risks must be clearly understood, articulated and managed. A detailed ratings system is a vital tool to bring greater clarity, transparency and certainty to the market," he said.
The Carbon Ratings Agency, run by the IdeaCarbon group of which Lord Stern is vice-chairman, said it would offer investors a guide to the quality of credits and the likelihood that they would be delivered. Sellers of carbon credits would have to pay to have their products rated, while buyers would also pay to gain access to the ratings.
Carbon credits are a key component of national and international emissions trading schemes that have been implemented to mitigate global warming. They provide a way to reduce greenhouse effect emissions on an industrial scale by capping total annual emissions and letting the market assign a monetary value to any shortfall through trading.
Credits can be exchanged between businesses or bought and sold in international markets at the prevailing market price. Credits can be used to finance carbon reduction schemes between trading partners and around the world.
There are also many companies that sell carbon credits to commercial and individual customers who are interested in lowering their carbon footprint on a voluntary basis. These carbon offsetters purchase the credits from an investment fund or a carbon development company that has aggregated the credits from individual projects.
The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project.
The Carbon Ratings Agency says it will provide ratings to market participants both on a mandated basis (where project owners or investors commission the agency to rate their carbon assets) and through the Agency's Market Initiated Ratings Service, which will give subscribers access to a representative range of carbon asset ratings on an ongoing basis.
Independent credit ratings are well-established instruments for enhancing the transparency and efficiency of financial markets. Like standard credit ratings, the new service will award scores ranging from AAA for the highest quality, lowest risk offset assets, through to C and D for the highest risk assets which are least likely to meet their stated goals, IdeaCarbon says.
This development should help London solidify its position as the world center of carbon trading. International Financial Services London's (IFSL) new report on the $64 billion carbon markets shows that ECX (European Climate Exchange) carbon futures contracts, traded on the London-based ICE Futures Europe exchange, made up 89 per cent of exchange trading in the EU Exchange Trading System in 2007. The UK is also the leading investor in project-based transactions accounting for 59 per cent of credits purchased in 2007, up from 54 per cent in 2006.
Trading in the rapidly expanding carbon markets jumped a further 70 per cent in 2007, with the volume of carbon dioxide emissions transacted worldwide rising from 1,745 million tonnes carbon dioxide to 2,983 million tonnes. Allowance-based transactions, accounted for over two thirds of trading and project-based transactions the remainder.