Champagne corks were likely popping at the UNFCCC as carbon emissions trading schemes in the European Union and under the Kyoto Protocol were connected on Thursday morning after months of technical delays. So will the popping of the ITL cork unleash a torrent of pent up supply onto the market and ditch the CER price?

The ITL (International Transaction Log) enables the efficient transfer of credits between different national registers and the CDM (Clean Development Mechanism) Registry. This mechanism has until now proved to be the key bottleneck, constraining the efficient transfer of credits, particularly those sourced outside the Kyoto region.

ITL delays have further been identified as a key contributor to the significant price spread between EUA and CER prices, so, with the system now operational should we see these prices converging immediately? Well, perhaps not.

Trevor Sikorsky, of Barcap was quoted in the Guardian saying that in all likelihood the market will initially show a widening of the EUA / CER spread as CDM project investors oversupply the market with CER’s, looking to recoup some much needed cash from their investments. How the spread will then narrow will depend on the extent to which forecasts of a medium term undersupply of CER’s prove accurate.

Operationally, the news that the ITL is finally up and running is undoubtedly positive for the industry and in articular for CDM project operators. For short term prices though, the sudden removal of the ‘ITL stopper’ from the CER supply bottle will likely exert a significant downwards pressure.

Following this morning’s cabinet reshuffle by Gordon Brown it has been announced that Ed Miliband will take the reigns of a newly created UK government department as the new ‘Minister for Energy and Climate Change’. This will combine the energy responsibilities of the business department and the climate focus previously held by DEFRA.

With any luck, the appointment of an economist and treasury veteran to this key role might herald a turning point in governmental management of the ‘Climergy’ space. We need to move from an administration paralysed by indecision, amidst a sea of Climate Change rhetoric and posturing, to pragmatic implementation of sustainable policies which can secure support from pressure groups, the business community AND the voting public.

Operationally a huge amount of progress has already been made, but no one has yet figured out how to simply and clearly explain the results of all this to Joe Bloggs on street. The task here is all about communication with real people. Every conceivable objection to Cap and Trade as an effective tool in our armory to fight Climate Change has been rebutted time and again. It is, nevertheless, astonishing how often sloppy journalists in this sector begin yet another article with the ‘Climate Change Controversy’, ‘The continuing Carbon Offset debate’ or other equally tired one-liners. Only once this problem is solved will the politicians be able to get back to the real job in hand; that of implementing sustainable change.

Interestingly, the usually rather staid and hawkishly titled ‘Environmental Defense Action Fund‘ in Washington DC seem to be much more ‘right-on’ than us Brits with their efforts to persuade the US taxpayer of the merits of Cap and Trade. They have launched a public competition offering a $10,000 cash prize to the bright spark who can explain most concisely how a Carbon Cap will solve America’s Oil addiction. Might not be a bad example to follow Ed …

So given the increasingly headline-grabbing effects of the Global Credit Crunch, what can we expect to observe from the perspective of producers, buyers and sellers of emission certificates?

The effects of the current Credit crisis on Carbon markets might perhaps counter-intuitively encourage increased market confidence. Despite some recent drops in the market price for both EUAs and CERs due in part to softening in the oil price, the long-term outlook for the industry may be insulated or even improved by the ‘Great Credit Crunch’.

As this article from CarbonPositive points out, there is a risk, though by no means peculiar only to our industry, of a general lack of continued investment in origination projects. It should be noted however that this will not affect carbon markets to any greater extent than any other market hungry for scarce investment dollars. This danger is present in any times of increased uncertainty or unusually high cost of capital, and importantly, forces a much more rigorous analysis by investment managers of the future demand for a projects expected outputs.

In this context I’m more persuaded by James Murray’s article here. The gist of his compelling argument is that carbon credits could prove a safe long-term bet for nervous investors. David Metcalfe of green business research firm Verdantix agrees. “Fundamentally, you have to ask if you are going to have customers [for carbon credits],” he observed. “The answer is yes. Why? Because they are legally obliged to buy those credits.”

We’ll have to wait and see, but despite the short term fallout from the Lehman’s of this world unraveling their portfolios this may turn out to have positive implications for investment in the sector in the medium to long term.

I don’t suppose Gordon Brown has spent much time thinking about CERs or EUAs recently. Presumably it’s the abysmal by-election results and simmering leadership plots which keep him up at night. A Telegraph front cover this week earnestly reported that Alan Milburn had already signed up to be David Milliband’s new Chancellor. Mr Brown must be hopping.

But interestingly CERs and EUAs could provide the magic dart he needs to reverse his poor political fortunes. Yes, really. Allow me to set out my stall.

The British public are fed up with high petrol and energy prices. With rising inflation, public sector wage freezes, tumbling housing prices and remortgaging no longer an option, there is simply less money in the household kitty to pay for it. And the effects are ubiquitous – commuting to work, heating your home, buying groceries and going on holiday are all more expensive.

In addition, disillusionment with perceived hypocrisy abounds. High emitting cars are now penalised through increased car duty, but the government approves Heathrow’s third runway with little apparent regard for the environmental consequences. Last week Centrica, who own British Gas, simultaneously announced a one third increase in fuel bills and pre-tax profits of almost £1b for the year end. So whilst Joe Punter struggles to pay his bills, Mr Cat gets Fat and Gordon Brown is apparently learning pilates in Suffolk.

Of course a substantial proportion of Centrica’s profits will be reinvested in the costly exercise of switching to renewable energy, and their profit only represented a 4% return for their investors, but that doesn’t cut the mustard with a sceptical public. If only there was a way to make it all seem fairer.

There might be. The permits which allow and limit the amount of pollution produced by European energy companies and others, known as EUAs, are currently given out by most EU member states for free, including the UK. But each tonne of them can be freely bought and sold at market; at today’s prices each tonne is worth €19.10 each. Point Carbon has estimated that this will create a windfall profit of between €6 and 16 billion for energy companies in the UK alone. Nice, if you happen to be an energy company.

A fairer alternative is to auction them off. Fearful of alienating stakeholders in their pioneering cap-and-trade scheme, the EU has limited the maximum auctionable proportion at 10% of each national allocation. However 10% amounts to roughly £1.5b of new revenue for the UK government over four years, and this figure is liable to increase ten-fold after 2012 with EU plans to abolish the auction limit altogether. Cap and trade schemes proposed in Australia and the United States already propose that 100% of permits should be auctioned.

Auctioning could also narrow the price difference between the EUA and the CER, a comparable emissions reduction certificate used by the UN Clean Development Mechanism to tackle emissions in the developing world, and also valid as an EU pollution permit. Faced with having to pay for EUAs, post-auction carbon markets could value CERs higher as their relative cost: compliance value ratio looked more attractive. This may add to convergence pressures from the news this week that the EU plans to go live with the international transaction log, the software linking the two schemes, in October this year.

Of course the energy companies would probably pass the cost on to their customers through raised prices, so are the public not effectively worse off as a result? That depends on what Gordon Brown decides to do with his new revenue.

He could use some of it to invest in renewable energy or other progressive technologies. For example the CBI believes that EUA proceeds should be used to fund carbon capture and storage demonstration plants, although the WWF are sceptical. But the energy companies would argue that much of their profits are currently allocated to developing renewable or sequestration technology anyway so auctioning would merely add unnecessary cost and bureaucracy.

Perhaps more compellingly, Mr Brown could channel a sizable proportion of the money directly into fuel poverty reduction and finally appeal to the intransigent public and their day-to-day concerns. A populist move with benefits for the environment and the economy: just what the doctor ordered.

Kevin Rudd’s government in Australia is already on top of this: the influential Garnaut report, which attempts to shore up some of the detail around their planned cap and trade system for 2010, recently suggested that “Fifty per cent of all revenue from emissions permits should be returned to households via tax breaks, social security payments and energy efficiency incentives – concentrated on the lowest half of income earners. Of the remaining half of permit revenue, 30 per cent should be spent on compensation and adjustment in business and industry and 20 per cent should fund the commercialisation of low-emission technologies.”

To be fair, the logic hasn’t escaped Mr Brown entirely – the UK plans to auction 7% of its national allocation at the end of 2008. But increasing this to 10% as part of a package of well thought through plans to tackle fuel poverty and other sensible initiatives might go down rather well with UK voters. And it also lets him neatly sidestep the misplaced calls for him to increase corporation tax for energy companies and lets EUAs and CERs do what they’re supposed to do: set the minimum price required to reduce pollution.

Caught between Northern Rock and a hard place, Gordon Brown must peer out at the darkening economic gloom and wonder if his political sun will ever shine again. What he needs is some bright ideas. So where shall we start the bidding Gordon – 7 or 10%?