Citigroup on climate change

A new report on climate change and carbon trading from Citgroup “Carbon Trading: The Sky’s the Limit – Trading our way out of trouble” has some interesting, if often said predictions:

“ International politics appears to be coming to a consensus on carbon trading — Updated scientific evidence of climate change and economic theory on the most cost effective solutions have triggered significant shifts in climate policy this
year, with carbon trading emerging as a consistent theme.

 The Global Carbon Account — Under the Kyoto Protocol, Annexe 1 countries bound by emission targets are within sight of compliance as a group. However up to 5bn carbon credits will need to trade between participants to enable country level compliance. We expect these “global carbon credits” to trade at around €15 through the Kyoto Compliance Period.

 Regional schemes emerging — Our analysts across the world are seeing state and national level emission trading schemes emerging (particularly in the US, Canada, Japan, Australia and China). We set out our “satellite model” of linked regional schemes which we expect to develop post 2012.

 EU ETS in detail — Within Europe we see EUA prices for Phase 1 remaining low (€0-1) for the remainder of the period, but rising to €20 during Phase 2. Following analysis of EPS sensitivity to a €1 shift in the EUA price, we highlight
Verbund as the best way to play rising permit prices.

 The new carbon industry — With demand growing under the Kyoto Protocol, EU ETS and proposed regional schemes in the US a new industry in emission abatement and trading is developing.”

They conclude that:

“There will be new opportunities; new markets worth an estimated $100s billion p.a.”

“When expressed in economics terms, the reality of politicians sticking their heads in the sand over capping emissions appears not just foolish, but possibly negligent.”

Finally, they caution that:

“Negotiations regarding the second stage of emission control are at very early stages and will progress through 2007 and 2008. Key changes in attitude towards the need for emissions controls in the US, China and Australia make a post 2012 agreement more likely, but we caution that there is still a lot of politics to get through before any specific targets or mechanism are agreed.”

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