Friday, December 25, 2009

Carbon Market Musings

Supply and demand. Fear and greed.

These two pairs of terms are all you need to know about what drives markets.
Market fundamentals are based on supply and demand. Market emotion is based on fear and greed.

The market fundamentals of global warming (when it was still credible) were in the area of renewable / sustainable energy, and in carbon trading. Renewables have their own intrinsic economics, which can be distorted by government subsidies but which sooner or later have to pass a reality test. Carbon trading has no intrinsic economics, it is simply based on some fiat declaration of the price of carbon.

This fiat was one driver of the Kyoto Accord, embodied in its Clean Development Mechanism and Joint Implementation, which allow a developed country to buy indulgences from other countries.

As the sham science of global warming is gradually revealed, the political power to declare carbon prices diminishes, and emissions trading schemes lose their emotional support amongst the general public. Australia is the bellwether of this trend, and is now going through a phase of confusion and fingerpointing. More to come elsewhere, I promise.

The World Bank publishes an annual report on the state of Carbon Markets. The 2009 version makes for interesting reading. It notes that one purpose of the Copenhagen conference was to "scale up climate mitigation" in developing countries. In other words, buying more indulgences.

Who buys these indulgences? How much are they worth? Just as there is only one taxpayer (you), there is only one consumer (also you). How do you feel about $150 Billion per year? What would you like in return?

You pay, as part of a global shakedown, so that you can continue to have what you currently have. No CO2 emissions are cut, but money goes to some third world regime so that they can cut down an old forest and replant with something that grows faster.
You pay. No value is added anywhere.

When the global warming panic really hit a few years ago, I watched as industry and governments wrestled with the science and the politics. I was surprised when the people that I thought would fight just hunkered down and went along. Now I realize how naive I really am, since I totally missed the opportunity to be part of a 9 figure per year carbon market. And look at the
business opportunities to support it!

But we are about to find the supply of carbon offsets outracing the demand for them. And the fear mongering that created the market in the first place will be replaced by the fear of being the last fool left standing in the market when the music stops.

Blogger extraordinaire JR notes that the
carbon market reacted poorly to Copenhagen. I am going to figure out a way to short GRN, the ETN that tracks carbon trading. Looking at the charts, we can see support being pulled out from under it, with lower highs, lower lows, a reverse head and shoulders and a P&F target of $17, well below its Dec 24 close of $23.50.

Supply and demand. Fear and greed.


JR said...

Hi Halfwise. Great post and thanks for that glowing plug (inspired by analogy with a Merc diesel no doubt):)

GRN is actually an ETN rather than ETF. I wasn't sure how they differ from ETFs but Jonathan Chevreau discussed them a couple of days ago in the FP.

A belated Merry Christmas and all the best in 2010!

Halfwise said...

Thanks JR. Nice work with the glow plug comment.

I have edited the ETN and plugged in your link behind the acronym. Ironic; these things are examples of the derivatives, generally unregulated and unprobed, whose uncertain provenance is behind much of the financial excess then collapse of the past 3 years.

When it says "sophisticated investors" the prospectus means "lots of money, few votes".

Merry Christmas and a wonderful 2010 to you and your family.