Huge potential in carbon trading


The Star, January 7, 2008

UNDER the Kyoto Protocol, developed nations that have ratified the treaty are committed to reduce their greenhouse gas (GHG) emissions by 2012 to about 5% below their 1990 levels. 

The reduction of GHG emissions can be achieved by restructuring operations and processes to physically reduce GHG emissions; and by “buying” carbon credits to meet carbon emission reduction deficits.  

The second option can be accomplished through financial exchanges, by supporting Clean Development Mechanism (CDM) projects which reduce emissions in developing countries, engaging in joint implementation projects, or by buying carbon credits from companies or developed countries that have excess allowances.  

In this regard, although developing countries are not obligated to reduce their GHG emissions, they play a significant role in respect to CDM projects and generating Certified Emission Reductions (CERs).  

CERs are a form of carbon credits, issued by the CDM Executive Board for emission reductions achieved by CDM projects.  

CERs can be traded and used by developed countries to comply with emission reduction targets, thus creating win-win relationships between developing and developed countries. 

As an emission-trading scheme under the Kyoto Protocol officially commences in 2008, we expect to see an acceleration in carbon trading. The World Bank estimates the global carbon credit market was worth US$30bil in 2006, up threefold from 2005.  

Presently, carbon trading is most developed in the EU, where the EU trading system has been in effect since 2005, accounting for US$24bil (about 80% of total trades) in 2006.  

As a developing country with ample agricultural and natural resources, Malaysia stands to be a significant beneficiary as we foresee CER creation gaining prominence in Malaysia in the near future.  

Malaysia already has 22 registered CDM projects, and most CERs generated in Malaysia, are generated from biomass plants.  

As at March 2007, two of the 22 CDM projects had sold 320,000 tonnes of CERs valued at less than RM10mil.  

And we expect CER trading to increase up to 2012, with the Malaysia Energy Centre estimating that the country has up to 100 million tonnes of carbon credit potential, which translates into RM4.8bil in potential revenue.  

The most obvious beneficiary of CER trading in Malaysia is the plantation sector, particularly oil millers, with 395 operating oil mills potentially raking in RM252mil of yearly income from three typical projects: composting of empty fruit bunches (EFB) and palm oil mill effluents (POME); biogas recovery from effluent to energy; and conversion of biomass (palm kernel shells, EFB) to energy. 

In addition, the power, manufacturing, waste management, forestry, oil and gas, and transportation sectors have also been identified as potential beneficiaries.  

From a company’s perspective, the key driver for participation in CDM projects would be their economic viability. From a financial perspective, as far as oil millers go, investments in CDM project technologies are justified with payback periods of less than eight years, mostly averaging three to five years.  

As an added incentive, carbon credit income is also exempted from Malaysian tax between 2008 and 2010. Qualitatively, engaging in sustainable, environmentally sound strategies and practices also makes for good corporate responsibility and contributes to a cleaner environment. 

We have identified two categories of beneficiaries from our carbon credit theme: generators and vendors of CERs; and facilitators/enablers of CDM initiatives in supplying the assets/equipment to generate CERs.  

CER returns are likely to be small in Malaysia’s context. In the instance of plantation mill operators, each mill is estimated to generate only RM1mil to RM2mil of incremental net income annually.  

Earnings impact is therefore more pronounced among small-mid-cap companies with net profits of less than RM50mil per annum. But the earnings potential for the plantation industry as a whole is enormous.  

Our top picks of small-mid cap beneficiaries who are (potential) carbon credit generators are CB Industrial Product Holding Bhd (CBIP), QL Resources Bhd, TSH Resources Bhd, Kim Loong Resources Bhd (Not Rated) and Lafarge Malayan Cement Bhd (Not Rated), while the enablers are CBIP and Eonmetall Group Bhd (Not Rated). 

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