Carbon credits in compliance markets make poor strategic investments: Morningstar

INVESTORS should not bet on the price of carbon credits rising in cap-and-trade regimes, because most compliance carbon markets are ineffective in raising the cost of emissions, according to a recent report by Morningstar Equity Research.

About 17 per cent of the world’s greenhouse gas emissions globally are currently covered under cap-and-trade systems, where governments “cap” the amount of emissions for specified industry sectors, Morningstar wrote. Companies that emit less than their carbon budgets have excess carbon credits, which can be sold on compliance carbon markets to those who need credits.

By controlling the supply of carbon credits, cap-and-trade regimes are supposed to induce a price on carbon. As the carbon budget is lowered, the price of the credits should increase to reflect the higher cost of emissions.