FSA warning on carbon credit trading

The FSA has issued a consumer warning about firms promoting carbon credit trading schemes.

A carbon credit is a certificate which gives a company the right to emit one tonne of carbon dioxide (Co2). This right to emit greenhouse gases is valuable and can be traded.

Carbon credits are either voluntary emission reductions (VERs) or certified emission reductions (CERs). It is VERs which are increasingly being promoted to UK investors.

With carbon credit trading being touted as the “next big thing” in commodity trading, the FSA has been quick to issue a timely consumer warning highlighting the risks.

They point out that any Over-The-Counter (OTC) markets trading requires a high degree of investor experience and skill.

There is a big danger an investor in carbon credits would not obtain a competitive rate, particularly when buying a small volume of certificates.

The ‘certification’ of carbon credits is a voluntary initiative involving a number of different bodies. Seeing that a carbon credit is certified offers nothing in the way of investor protection.

With most voluntary emission reductions based overseas, UK investors get no protection from UK government. Investors are unlikely to have any recourse to the Financial Ombudsman Service (FOS) or Financial Services Compensation Scheme (FSCS) when things go wrong.

Whilst the FSA does not regulate the sale or trading of carbon credits, they do regulate collective investment schemes and certain types of exchange contracts, called ‘futures’.

If a carbon credit promoter is being operated as a collective investment scheme or futures contract, the FSA can take direct action against that scheme if it is unauthorised.

Having looked at carbon credit trading this week for a financial publication, we have concluded that this is a market which is wholly unsuitable for retail investors.

Any call from someone trying to promote an investment in carbon credits should be ended swiftly. Always seek professional advice from a regulated independent financial adviser before parting with your money.

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