Carbon Prices Fall Along with Oil and Other Commodities

Carbon prices (as measured by Certified Emissions Reductions or CERs) have declined by 24% since peaking in early July. The fall in carbon prices mirrors that of energy commodities such as oil and other commodities such as precious/industrial metals and agricultural products.On the European Climate Exchange, the leading exchange for the secondary market trade of issued CERs, December 2008 CERs closed at 17.25 euros ($27 USD) on August 1, which is off by 24% or 5.50 euros from a peak of 22.94 euros in early July.

The European Union Emission Trading Scheme (EU ETS) is the largest market for the trading of emission allowances, spanning 28 countries throughout Europe; and other developed countries such as the US, Japan, and Australia are developing similar ETS markets. Carbon commodity trading is dominated by EU Allowances (EUAs) with a 78% share, followed by CERs which are created through the United Nations climate change convention’s Clean Development Mechanism [CDM].

In December 1997, the Kyoto Protocol was enacted to reduce the emission of greenhouse gases by 5.2% from 1990 levels during the period of 2008 – 2012, resulting in quotas that are imposed on the industrial carbon emissions of participating nations Greenhouse gas emissions are quantified as an equivalent of tons of carbon dioxide (CO2) released into the atmosphere. The CDM provides the opportunity for developed nations such as the United States to purchase carbon credits or CERs (certified by the United Nations and equivalent to the reduction of one ton of CO2 emissions) which are generated from renewable energy projects in participating countries such as Vietnam and China.

The tremendous financial opportunity for companies such as EcoloCap Solutions [OTCBB: ECOS] and EcoSecurities Group [London: ECO] lies in their ability to generate CERs in emerging and frontier markets at a below-market cost and then sell the carbon credits at current market prices in developed countries such as the US. Also, Barclays has recently launched an exchange-traded note to track the global price of carbon.

The iPath Global Carbon ETN (GRN) (down by nearly 10% in the last five trading days in sympathy with the carbon market and other commodities) trades throughout the day just like stock and is structured to track Barclay’s Global Carbon Index Total Return, with several similar products in registration for potential market launches to provide investors with simple, low-cost access to the market for carbon credits. These carbon credits are traded by companies who get tax breaks and other incentives for lowering pollutants into the air, as well as investors and speculators who want to participate in the global reduction of greenhouse gases.

A summary of the performance (1-month, 1-year returns listed) included below and in the accompanying table of exchange-traded funds for major commodity classes versus the S&P 500 SPDR (SPY) (+1.6%, -10.7%) reveals recent weakness across all types of commodities on fears of a global economic slowdown and a correction to the major run-up over the past year.

• United States Oil Fund (USO): -18.2%, +69.4
• SPDR Gold Trust (GLD): -6.5%, +29.1%
• iShares Silver Trust (SLV): -9.9%, +24.6%
• PowerShares Agriculture Fund (DBA): -18.4%, +31.7%

Stock position: None.

Comments

[Mike Havrilla:]

Author Disclosure: Long EcoloCap Solutions (OTCBB: ECOS)

2008 Aug 06 09:54 AM