Carbon will mature as inflation hedge

According to Reuters, “The $126 billion global carbon market will mature so that investors will use it as a hedge against equities and inflation, Bache Commodities Ltd.’s emissions trading head told Reuters in an interview.

Crude oil or gold have often been used to hedge against inflation risk or equities, as investors believe they can offer some protection against rising consumer prices.

“The carbon market is expanding on a rapid basis,” said Andrew Ager, head of emissions trading at Bache Commodities Ltd.

“As the U.S. gets cap-and-trade legislation and the Australian bill is passed, the market could mature to become a similar commodity to oil in the way it is used by hedgers as a strategy,” he added.

The EU’s flagship emissions trading scheme (EU ETS) began in 2005. Prices for permits traded under the scheme, called EU Allowances (EUAs), are the global benchmark for emissions markets.

EUAs frequently correlate to oil and German power prices, as well as natural gas and coal. A sign of the relatively young market’s development is that these markets have started to look at carbon prices for direction.

“There’s now a situation where oil, coal and gas traders are looking at carbon prices for direction. That’s a complete 180 (degree turn),” Ager said.

“Say you have a portfolio of mining shares, it is possible to use carbon as a hedge as part of your portfolio. (Carbon) has even correlated with copper quite strongly recently. As people look at copper as an indicator of industrial growth, it makes sense.”

Reuters estimates show EUA prices have shown a weekly correlation of 0.75 with copper since November 1, and 0.85 in the corresponding period the previous month.”

Source: Reuters