Sector snapshot: Carbon trading

eFC logo

So what is carbon trading?

It's about trading carbon emissions in the same way you might trade, say, oil. The main tradable units are EUAs (EU Carbon Allowances) and CERS (one tonne of CO2 equivalent) and ERUs (Emission Reduction Units) - carbon credits created under the Kyoto Protocol.

Why all the fuss?

Carbon trading's been around since 1997, but has only really gained traction over the past 16 months, thanks to the European Emissions Trading Scheme. Last May there was a slight hiccup when the price of EUAs fell from €26.95 to €13.60 in a single week after it emerged that carbon credits had been over-allocated in 2005. A report this week from International Financial Services London (IFSL) said the volume of carbon credits traded doubled in 2006 to the equivalent of 1.6m tonnes. The UK accounted for 60% of all carbon project transactions last year.

Who are the players?

Plenty of banks already have carbon trading desks - Barclays Capital, Deutsche Bank, Goldman Sachs, JPMorgan, Morgan Stanley, and Merrill Lynch are among the most established.

Who's hiring?

In April, Citigroup hired Alan Bannister and Heidi Forbes from Tradition Financial Services to set up a carbon trading desk; more hires are possible. Headhunters say Bear Stearns is also expected to hire after it brought in Etienne Amic, the former global head of commodities at Calyon, to run its European energy trading business earlier this month. Goldman, UBS and Deutsche are also said to be in the market for new hires, and hedge funds are sniffing around.

Who are they hiring?

Recruiters say the big demand from banks is for people who can originate and arrange the financing for projects that create carbon credits, rather than for actual carbon traders.

"Banks are currently looking for commercial individuals with a track record of carbon origination specifically around CDM [Clean Development Mechanism] and JI [Joint Implementation] initiatives, which will create value through tradable carbon certificates, project finance and equity investment opportunities," says Mark Tomlinson, a consultant at DNA Search.

Tom Lindsay, a consultant at Human Capital Search, says the projects they work on typically involve reforestation and wind farms and are often located in the emerging markets. "These projects reduce greenhouse gas emissions that otherwise wouldn't be reduced and are often financed by carbon funds or banks," he says.

Deal originators need to understand the complicated risk and regulatory issues surrounding carbon trading. Banks' favoured hunting grounds are carbon consultancies such as Camco.

By comparison, there are relatively few pure carbon traders - most trade power as well. Carbon traders typically have a commodities or power background.

How much are they paying?

For carbon traders, not much. The market is smaller, less liquid and there are far fewer derivative products than for other commodities. As a result, margins are lower and banks aren't inclined to splash out on pay. "If you're an accomplished senior oil trader making good seven-figure bonuses, it is unlikely in the short term that you would have a similar bonus potential moving over to a pure carbon trading role," says Tomlinson. That said, some carbon traders are said to have demanded "quite a lot," in recent moves.

Recruiters are more specific about the packages on offer to deal originators. Tomlinson says a VP or director-level originator can command 75k to 120k in base, plus a potential maximum first-year guarantee in the low six figure range. Lindsay says total comp of around 200k for experienced originators is about right: "It's not multiple multiples yet; bonuses are around 100% to 200% of salary but, as the banks develop their businesses, bonuses awarded will reflect this and start to multiply."

What future?

There's still some debate over the future of the carbon trading market post 2012, when the first commitment period of Kyoto expires. But the amount of carbon traded is expected to rise by 50% this year alone and the use of derivative products is likely to increase as the market develops. "You need to look at the long-term career returns," says Trish Collins, managing director of commodities-focused search firm Exchange Consulting. "Carbon trading isn't going to go away."

Close