Carbon market is no safe haven yet

By Nina Chestney - Analysis

LONDON (Reuters) - New carbon commodities are government-guaranteed in the climate change fight, but are still too complex and immature to provide a haven for investors fleeing financial markets' rout.

Cap and trade schemes place a limit on industry emissions of heat-trapping gases like carbon dioxide, introducing a growing global trade in carbon permits worth $64 billion last year.

Those limits are legally binding, and so underpin long-term demand for these new commodities and inject price certainty which looks attractive during a global stocks sell-off.

But the market's relative novelty and complex regulatory framework are deterring a wave of investment for now.

"The market is uncorrelated with equities. That may make it a safe haven, but people are not rushing into it because the technical barrier is too high," said Frederic Brodach, portfolio management director of Dexia Carbon Fund Managers.

The European Union's emissions trading scheme launched in 2005 is the hub of a global carbon market which also includes carbon offsets traded between rich and poor countries.

"The carbon market is just as risky as the turmoil going on in equities. It's new, people don't fully understand it, and there's a lot of political risk," said Trevor Sikorski, carbon analyst at Barclays Capital.

Political risks include uncertainty over carbon caps after 2012, under a new global treaty slated for agreement next year, but now bogged down in squabbles over cost, responsibility for global warming and a U.S. election.

In addition, the new market is over-elaborate or even obtuse to some, and has spawned its own lexicon of jargon and acronyms.

"We have to go through a lot of effort to explain the regulatory framework and technicalities to experienced bankers," Brodach said.

WEATHER

Carbon emissions permits including EU allowances (EUAs) and Kyoto-based certified emissions reductions (CERs) have been hit by the general markets slide, showing some link with equities.

That is because a global slowdown would cut industrial output, and thereby carbon emissions, hitting EUA, CER demand.

EUAs have tracked the MSCI index of global equities over the past month with a correlation of 0.98, near a perfect score of 1. CERs have shown far less stocks correlation in the past four weeks, scoring 0.56.

But other factors also impact carbon demand, for example a cold winter would drive up emissions, and no amount of EU recession is expected to wipe out EUA demand.