After Climategate, Should Savvy Investors Short Carbon Credits? (PJM Exclusive)

Just how badly have Climategate and the failure of the UN climate change summit in Copenhagen hurt prospects for a global market in carbon “offsets”?

Camco International Ltd., bills itself as “a leader in demonstrating strong financial structuring and placement capabilities for carbon credits,” and is 19.5% owned by Al Gore’s Generation Investment Management. It was trading at 91 British pounds per share in April of 2007. Its shares, which trade on the London Stock Exchange, are now down in the 13.50 pounds per share ($20.56) range.

Climate Exchange Plc is the parent company of the Chicago Climate Exchange, a greenhouse gas market originally funded in part by the Joyce Foundation, on whose board sat Barack Obama. Its shares, which traded as high as 2000 British pounds a share back in August of 2008, have lost three quarters of their value and are now trading at about 500 pounds ($762) apiece on the London Stock Exchange.

The iPath Global Carbon Exchange Traded Note, “designed to be an industry benchmark for carbon investors,” is down 35% since its inception in June of 2008. With a market capitalization of just under $3.6 million and less than 600 shares changing hands on an average day, the instrument hasn’t attracted much investment attention.

But it’s doing better than the AirShares EU Carbon Allowances Fund, which shut down at the end of July 2009 after less than nine months in business.

“If there was a way, I definitely think you could make money hand-over-fist shorting this stuff,” said a fellow at the American Enterprise Institute and the Pacific Research Institute, Steven Hayward, who tracks environmental policy. He said the market for carbon offsets had plunged amid “eroding enthusiasm among policymakers for serious carbon constraints.”

In March 2010, two European carbon exchanges suspended trading amid concerns that some “certificates of emission reduction” were being illegally reused. Even Al Gore himself acknowledges that some carbon credits “fall into the ‘snake oil’ category” (talk about “an inconvenient truth”). Also in March, the governor of California, Arnold Schwarzenegger, asked the state’s Air Resources Board to give away most pollution allowances for free rather than auctioning them off.

For companies that sell carbon offsets or make markets in them, “whether they succeed or not is totally dependent on regulation,” said the managing director of Camino Energy, Mark Henwood. “If the regulation doesn’t come through, there isn’t going to be any business there.”

Without a “cap,” in other words, there isn’t much to “trade.”

Mr. Henwood said that investors in solar energy are better off than those investing in carbon offsets. At least at the end of the day, the solar guys will have some electric power to sell. In the carbon offsets market, “nothing of economic value” is being exchanged except something whose value is created by regulation, he said.

So is there a way for a savvy contrarian investor to cash in by betting against the liberal conventional wisdom on climate change, in the same way that John Paulson or Michael Burry made billions of dollars by betting against the mortgage-backed securities that were the product of liberal conventional wisdom that said every poor person should be a homeowner?

It might be possible, but it’s not easy, and it’s highly risky.