Guest Contributor Michael Green, continues his post on the coming green bubble.
Corporations will create the initial demand but corporate demand alone is not enough. Just like the Tech Bubble of 2000 and the Housing Bubble of 2008, it is the individual consumer who will provide the final “gas” needed to inflate the bubble.
In 2000, it was retail investors who really pushed things over the top with their endless demand for the Tech stocks. The same thing happened in 2008, it was the individual consumer that played the housing market game and provided the critical mass of demand needed. In both cases, the sky was the limit and people thought that “this time it is different”. So how will the Green Bubble blow? Where will the demand come from?
Money will move to where it is expected that a strong profit can be made and the American Clean Energy and Security Act of 2009 appears to support this.
As mentioned there is a year on year reduction in the amount of credits issued. This is a unique situation as normally supply and demand forces interact together to determine prices. However in this system, the supply of carbon credits is “fixed” regardless of the demand. This will provide at least an automatic support for prices and should encourage price inflation all things being equal.
Companies are now pressured to reduce their carbon footprint. It only makes sense that there will follow a boom in new environmental technologies to achieve those goals. Just like in the Tech bubble, we can expect all manner of start-ups racing to develop the new technologies. It will not be long before the retail investor gets interested and attempts to seek alpha in this area.
So we have the combination of government legislation which will spur the initial corporate demand. Followed with consumer demand and we have the support needed to get the bubble started. All that would be needed then is that last piece of the puzzle to fall into place. Supply. Providing “supply” would come in the form of new financial products geared toward fulfilling this demand. As night follows day, where there is demand someone will come along to provide supply.
I can envision a host of new financial products on the market to cater to the retail investor’s interest in carbon trading.
- I can foresee the development of new indexes to measure the value of carbon credits or emission rights.
- Then options and futures products based on these indexes and the value of a credit.
- We will also see the development of exchange traded funds and other mutual funds based on the new carbon credit index or based on a basket of environmental related companies that will be seen as the new “growth” companies.
The real fun will start once the general public gets caught up in it and once again everyone will get involved and want a piece of the action just like with the Dutch tulip bulb bubble of the 17th century. So there we have it, the next bubble and how it might well develop.
If it's Green, does that mean it's good?
I hope that I am proven wrong though. Do we really want more bubbles with their boom and bust cycles? I would rather sustainable economic growth become the norm. Well, I can only dream!
The Green Bubble Cometh - Part 1
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Michael Green has been living in Japan for 9 years and resides in Tokyo. He has worked in the Financial industry for most of his career. He is a specialist in Business Process Re-engineering and Project Management.
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