Investment banks flock to booming carbon trade

LONDON (Reuters) - Banks are jostling for a piece of what may be the world's fastest growing market, trading carbon emissions permits: Citigroup has just waded in, Bank of America is set to and Deutsche has doubled its team.

Societe Generale, Fortis Bank and Morgan Stanley have all added to their carbon trading desks this year.

Global carbon market traded volumes were worth less than $1 billion in 2004, $11 billion in 2005 and over $30 billion last year, according to the World Bank.

Rejection of the fledgling market by the world's biggest carbon emitter, the United States, as well as a price collapse last year have not dented hopes it will be a key plank in the world's response to climate change.

"It's got beyond the phase where people thought it's a flash in the pan," said Deutsche's (DBKGn.DE) Mark Lewis, who became a full-time carbon analyst last month.

"The team has doubled in size over the course of the last six months, we now have over 10 people covering emissions globally," said Kevin Rodgers, Deutsche's head of complex risk in commodities and foreign exchange.

Banks see many opportunities from climate change.

Their project finance teams can advise clients on how to earn carbon credits from clean energy projects, their commodities and energy teams can then sell those credits to other clients facing emissions targets, while their research teams can advise the likes of pension funds on investing sustainably.

In addition, it never harms their brands to mention all of these in the context of helping to save the planet.

Citigroup Inc. (C.N) said this month it was committing $50 billion to environmental projects over the next decade, hot on the heels of a similar, $20 billion plan announced by Bank of America (BAC.N).

"This is the first time that Citi has traded Kyoto emission products," said Citigroup carbon trader Alan Bannister, who joined the bank six weeks ago, and referring to the trade in rights to emit greenhouse gases between rich and poor countries under the Kyoto Protocol.

"It's in response to increasing volumes of client enquiries and requests in this area."

THEME

Through its join venture Orbeo, France's Societe Generale (SOGN.PA) has accumulated a stockpile of carbon credits from emissions-cutting projects in South Korea and Brazil, and it has made two hires this year to help sell these.

Earlier this year U.S. investment bank Morgan Stanley (MS.N) took a stake in Miami-based carbon project developer MGM International, after announcing it would invest $3 billion in carbon markets, and has also made new hires to its trading team.

Belgian-Dutch Fortis (FOR.AS) has set up a new Hong Kong carbon trading desk this year to tap into a lucrative market in China, where industry can earn carbon credits, for example, by destroying the potent greenhouse gas methane in coal mines.

Fortis now has a team of 16 people covering emissions globally, after other hires this year in Amsterdam and Houston, the bank said.

Investment banks also want to cash in on demand from funds for research on how to make climate-friendly investments.

"It is hard to estimate the true impact we're all going to experience over the next 20, 30, 40, 50 years but quite possibly this will be the investment theme of all investment themes and will impact every aspect of our lives and our economic behavior," said Alan Brown, group chief investment officer at Schroders plc.