Trade Carbon Emissions with ETFs

The U.S. House of Representatives narrowly passed the American Clean Energy and Security Act of 2009 (ACES) on June 26, 2009. The act mandates a 17% reduction in greenhouse gas (GHG) emissions from 2005 level by 2020. It also requires that by 2020 more than 20% the nation’s electricity should be generated from reusable sources, such as solar, wind, and geothermal. Even though the bill faces a lot of uncertainties in the Senate before it can become a law, the legislation is hailed by many as a milestone in addressing issues related to climate change due to greenhouse gas emissions.

In addition, the bill also presents investors an opportunity to profit from carbon emission trades because, basically, the ACES establishes a carbon emission cap-and-trade program which essentially makes carbon dioxide emission a commodity that can be traded. The cap is the target to reduce GHG emissions by 17% by 2020 and the trade is to create a market for carbon emission allowances that allows polluters turn pollution cuts into revenue as the market will let them trade their allowances (the less they emit GHGs, the more allowances they have) for profits.

Even though currently there isn’t a marketplace in the U.S. for corporates to trade carbon emission credits, that could change if ACES becomes the law. Nonetheless, there are a few options available for investors to trade carbon emissions. Hopefully, one day there will be a tradable U.S. carbon credit plan as well.

iPath Global Carbon ETN (GRN)

iPath Global Carbon ETN (GRN) (learn more about exchange-traded notes) tracks the Barclays Capital Global Carbon Index Total Return (“BGCITR”), an index that is designed to “measure the performance of the most liquid carbon-related credit plans and is designed to be an industry benchmark for carbon investors.” BGCITR’s objective is to provide exposure to the global price of carbon emission credit. It is composed of only two carbon-related credit plans that are currently available in the carbon emission market:

  • European Union Emission Trading Scheme Phase II (EU ETS )
  • Kyoto Protocol’s Clean Development Mechanism (CDM)

with the European plan making up 79.35% of the index and 20.65% for CDM. As new carbon-related credit plan being developed (maybe a new plan will come out of the Act), they will be incorporated into the BGCITR index to broaden its coverage. The index’s composition is adjusted annually.

iPath GRN are senior, unsubordinated, unsecured debt securities issued by Barclays Bank. The ETN has an yearly fee of 0.75% (investors fee is calculated as the yearly fee times the principal amount of securities times the index factor). GRN was introduced on June 24, 2008 and will mature on June 24, 2038.

GRN’s YTD return is -5.97% and 1-year return -40.23%.

AirShares EU Carbon Allowances Fund (ASO)

ASO is an exchange-traded fund launched by XShares Advisors LLC on March 31, 2009. The fund invests in future contracts for European Union Allowances (EUAs) traded under the EU ETS scheme mentioned above. The objective of ASO is to provide investors with investment results that correspond to “the performance of a basket of exchange traded futures contracts of EUAs.

Even though ASO is an ETF, it doesn’t track an index like most other ETFs do. Rather, it is a commodity pool that is passively managed. The fund’s portfolio consists of a basket of up to four listed December EUA futures contracts that will expire in December 2009 through December 2012. Each contract provides for delivery of 1,000 EUAs at a specified price (however, AirShares don’t take physical delivery of the EUA contracts). In addition, ASO also holds long positions in a portfolio of ECX CFI futures contracts listed on the ICE Platform.

Since its inception, ASO has a 1-month return of 16.75% and YTD return -24.63%. The fund charges 0.85% management fee and it’s rebalanced annually by replacing expiring contracts with contracts of later expiration dates.

*Stock chart from INO MarketClub

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