Institutional investors should consider investing in the global carbon market as the world attempts to cool itself down, according to research from consultant Watson Wyatt.
The report looked at ways in which institutional investors in Australia could make money out of the growing carbon trading market.
"So long as governments remain committed to emission reduction and so long as emission reduction initiatives remain challenging there is a possibility that carbon emission prices could keep rising," the report said.
Carbon trading was introduced as part of the Kyoto Protocol in 1997. Its aim was to reduce the level of carbon dioxide in the air to 5.2 per cent below what it was in 1990.
Companies are set emissions targets. If a firm emits more than its target, not only will it have to purchase more allowances, but it may also be fined.
Conversely, if that company pollutes less than its target it will be able to sell unused allowances on to those companies that do need them, or even third-party investors such as superannuation funds and endowments.
Although Australia, along with the US, has yet to ratify the agreement, superannuation funds can access the market through third parties such as hedge funds.
The report said, however, that this was a short term approach and those investors who wanted to take a longer term view should look into funds which have a greater degree of specialist knowledge.
Clean energy investments are booming and according to some estimates $74 billion was poured into renewable energy in 2005 alone.
Speaking on a panel at the Conference of Major Superannuation Funds in Cairns in August, former ABC journalist and director of green lobby group Environmental Business of Australia Alan Tate said the global carbon market was set to become the largest commodities market in the world.
