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Greedy when people are fearful

August 3, 2010

If Warren Buffet’s famous advice to “be fearful when other are greedy and greedy when others are fearful” is a good rule of thumb for long term investors, then long term investors like Climate Change Capital are positioning themselves rather well in the international carbon offset market. You could only expect that we are at a low point in the market for carbon offsets right now, owing to credit market issues, the project registration bottleneck, and the general incompetence of the Clean Development Mechanism’s executive board that has led to the recent scandals over HFC projects. And there is also the great sense of uncertainty of what will happen post 2012 – yes, we are running out of time, and no, the US etc are probably not going to get a cap-and-trade system started by 2015.

That said, developing countries will certainly have an interest in retaining this mechanism into the future, as will investors in rich countries. The administrative problems can surely be ironed out over time, at least to some extent. And markets tend to overreact to perceived uncertainty even when often the final outcome is not all that uncertain! 

So when when demand for credits peaks again there’s sure to be only a limited supply of credits there to satisfy it in the early stages. Provided you have time to wait, at these low interest rates, why wouldn’t you want to be holding a slice of that?  

Just for clarification, I’m not actually advocating that the CDM is free from abuse, but I am beginning to change my view about it: I think it’s probably a worthwhile mechanism to diffuse technology, provide financing, and change the emissions baselines of developing countries conditional on two key points:

a) if adequate precautions are taken to ensure environmental credibility. And this seems to me that this is what the EU is trying to do with its current discussion on ‘quality controls’ on CDM offset credits that are allowed into the EU ETS (ditto for the US bills which apply a discount rate of 1 offset credit = .8 domestic compliance allowances)

b) the mechanism is not used as a substitute for domestic action on the part of developing countries, but actually compliments or enhances it through genuine technology exposure and capacity building. This is a big open question in my book. I haven’t seen a lot of research this, but my guess is it doesn’t.

c) The offsets that are used to reach given short term targets in developed countries are not also counted a second time by developing countries who say: ‘look, we have shifted our emissions baseline! We have made effort!’ For me, this is a trickier one, because I think this will tend to happen and could be a sore point in the negotiations – especially if we want a more ‘bottom up’ approach to individual country actions, rather than a global cap as imposed by the Kyoto Protocol. Might the ‘flexibility mechanism’ ulitmately turn into the ‘political weasel room mechanism’?

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