Carbon Credit Trading

Posted on | December 19, 2008 |

In the wake of a year-long historic election season and chaotic global financial markets, one of the most highly anticipated cleantech sectors has been ignored and all but forgotten.

Predicted to be a $1 trillion market by 2020 in the U.S. alone, carbon credit trading has fallen off the radar of most analysts and investors.

To be fair, the lack of attention is partly justified.

If you remember, a few years ago, a man by the name of Albert Gore won an Oscar for telling the entire world, $10 at a time, about global warming.

That, combined with the Kyoto Protocol making headlines, put polar bears and carbon trading close to all of our hearts.

Then came a little something that typically reduces interest in things that cost extra: a global recession.

Cap-and-Trade, Invest and Profit

I probably don’t need to tell you that the man running this country for the past eight years opposed limiting greenhouse gas emissions. He opposed it staunchly and remorselessly.

Even when the rest of the world joined hands, including China and India, Mr. Bush refused to sign onto Kyoto or to voluntarily agree to reduce his country’s carbon emissions.

And so the world went on without us, regulating their emissions and developing numerous financial instruments for buying and selling carbon credits, which is now a very lucrative industry.

It works like this: Companies are given a limit on the amount of carbon the can emit. Call it 20 tons to keep it simple. This means the company owns 20 carbon credits.

If they emit less than 20 tons of carbon for the year, they can sell the excess credits at market price. If they go over the limit, the have to buy a credit for every ton they’re over.

That’s really all you need to know about how cap-and-trade works.

Now you need to know how to profit from it…

How to Profit From Carbon Credit Trading

While it’s possible to buy and sell carbon credit futures, like any other commodity, I would advise against doing so. It gets pricey, you need to be a big player, and the market is nascent and complex.

Still, there are a few ways to profit.

Two funds have been created that track the price of carbon credits from the two major sources of the Kyoto Protocol: the European Union Emission Trading Scheme (EUETS) and the Clean Development Mechanism.

The be honest, the floor completely fell out of this market over the past few months. Increasing financial difficulty put climate initiatives on the back burner, and there was limited credit and capital to fund new carbon credit generation projects.

Now, the tide is changing.

The European Union recent committed to a binding target of reducing emissions 20% by 2020.

And Barack Obama has said he wants a cap-and-trade system here in the U.S. as well. His appointment of Lisa Jackson to head the EPA underscores this notion. Jackson also helped establish the Regional Greenhouse Gas Initiative (RGGI), the first mandatory, cap-and-trade CO2 emissions reduction program in the United States.

With the U.S. about to join the party, you can bet carbon credits will be in high demand. And that, of course, is when commodity prices rise.

Carbon Funds

Earlier I mentioned that two funds already exist that track the price of carbon credits.

• The first, called the AirShares EU Carbon Allowances Fund (NYSE: ASO), is a carbon exchange traded fund (ETF).
• The second, called the iPath Global Carbon ETN (NYSE: GRN) is, obviously, an exchange traded note.

Both of these seem like good long-term investments since the price of carbon credits is currently low, but will rise again when the U.S. enacts a cap-and-trade system and more interest in general returns to global warming mitigation post-recession.

There are also a handful of companies that specialize in carbon credit exchange, brokering, and verification that can be possible investment vehicles.

In addition, companies in certain sectors of the cleantech industry, like waste heat recovery and waste-to-energy, can also benefit from aggregating and selling carbon credits.

We’ll cover those in future issues.

To green energy and green profits,