Carbon will mature as inflation hedge

People walk on a street past a power plant's cooling tower in Yingtan, Jiangxi province December 11, 2008. Picture taken December 11, 2008.

LONDON (Reuters) - The $126 billion global carbon market will mature so that investors will use it as a hedge against equities and inflation, Bache Commodities Ltd.'s emissions trading head told Reuters in an interview.

Crude oil or gold have often been used to hedge against inflation risk or equities, as investors believe they can offer some protection against rising consumer prices.

"The carbon market is expanding on a rapid basis," said Andrew Ager, head of emissions trading at Bache Commodities Ltd.

"As the U.S. gets cap-and-trade legislation and the Australian bill is passed, the market could mature to become a similar commodity to oil in the way it is used by hedgers as a strategy," he added.

The EU's flagship emissions trading scheme (EU ETS) began in 2005. Prices for permits traded under the scheme, called EU Allowances (EUAs), are the global benchmark for emissions markets.

EUAs frequently correlate to oil and German power prices, as well as natural gas and coal. A sign of the relatively young market's development is that these markets have started to look at carbon prices for direction.

"There's now a situation where oil, coal and gas traders are looking at carbon prices for direction. That's a complete 180 (degree turn)," Ager said.

"Say you have a portfolio of mining shares, it is possible to use carbon as a hedge as part of your portfolio. (Carbon) has even correlated with copper quite strongly recently. As people look at copper as an indicator of industrial growth, it makes sense."

Reuters estimates show EUA prices have shown a weekly correlation of 0.75 with copper since November 1, and 0.85 in the corresponding period the previous month.

GROWTH

The European Union's executive Commission is aiming for the world's major emissions trading schemes to link by 2020.

Progress toward this goal is being hampered by U.S. cap-and-trade legislation's slow progress through the Senate and reduced expectations for a legally binding climate treaty in Copenhagen next month.

"I hope to see a global carbon market sooner than 2020. There is at least a framework for a future market. Regulation may get stricter, there will be foibles and quirks but the underlying (market) structure is there," Ager said.

Ager expects London to continue its reign as the hub of the global carbon market, flanked by a U.S. exchange and an Asian/Antipodean exchange.

An Australian carbon scheme is scheduled to start in July 2011. The government gained bipartisan political backing for its revised carbon-trade plan on Tuesday, but some opposition members still threaten to vote against it or try to have the Senate vote, expected on Thursday, delayed until February 2010.

"You do need something to push the southern hemisphere. You need that link up for a 24-hour market," Ager said.

Major metal market player Bache Commodities expanded into emissions trading by opening a desk in London in June. Ager heads a team of three emissions traders.

(Reporting by Nina Chestney; Editing by William Hardy)