Pure Capital, a New Zealand-based hedge fund firm, plans to launch a fund that will invest in the carbon market. Environmental legislation that limits permissible emissions amounts has created an entire industry, and emissions trading has led to a growing marketplace of companies trading carbon credits. Basically, if a company pollutes more than the allowed amount, it may “trade” emissions allowances with a company that has emitted less than the allowed quantity. In essence, this rewards those who reduce their emissions and fiscally hurts those who pollute more than they should.
This approach to emissions reduction has been hailed as a free market solution to environmental problems, as companies have a choice about when and how to reduce emissions. We assume that they’ll want to choose the least costly route, which—presumably—is emissions reduction.
Carbon trading makes up the bulk of emissions trading. It’s regulated by the Kyoto Protocol, and often takes place across national borders. The carbon market has been growing in current years, with an estimated $64 billion trade in 2007, as determined by the World Bank. London is one of the chief centers of the world carbon finance markets, and Pure Capital, which manages $43 million, is looking to open an office there.
According to Reuters, “The Pure Carbon fund, which will be seeded with the firm's money, will trade in the European carbon market and have an initial capacity of $20 million.” The goal is for the fund to expand as the carbon market grows and matures, but given the current economic climate, the Pure Carbon fund is also prepared to capitalize upon a carbon market slump. Anthony Limbrick, the chief investment officer of the fund, was quoted as saying: “We think there's a 30% chance the market collapses.” If that happens? Bad for the economy. Good for Pure Capital.
So what does this mean for emissions trading (and the environmental movement) in general? Is it somehow evil if hedge funds profit from a market downturn?
Let’s back up a moment: that’s what hedge funds do. The basic concept of a hedge fund is that investors pay people to manage their money. These hedge fund managers are theoretically worth their fees because they aim to make money for their clients regardless of the markets. Whether the economy is in an upswing or a downturn, these guys hedge their bets and try to walk away with positive returns.
Would it be a bad thing for the carbon markets to collapse? Yes. Very, very bad. But perhaps we can think about the glass as 70% full. The fact that this industry has garnered Limbrick’s attention at all can be seen as a positive sign for the future of green investing. The truth of the matter is that it’s a legitimate multi-million dollar industry, and—some might argue—the more attention it garners, the more it becomes a prominent sector for “regular” investors with financial motives. The world can’t survive on altruistic green intentions. Likewise, environmental change needs to come about because of true market forces.
We must admit the possible volatility or even collapse of the carbon markets. But just maybe, as the green sector increases in profitability and opportunity (for better or for worse), it will continue to take its rightful place in the pantheon of financial investments.
