The ETF Innovators Global Carbon Trading Index tracks the performance of 20 companies (summarized in accompanying table) from a starting value of 21,687 on 1/19/09 which are involved in a variety of green business activities, including the following:
- Financial exchanges for carbon credits
- Renewable energy projects resulting in the generation of carbon credits
- Greenhouse gas capture
- Waste-to-energy projects
- Investment funds which specialize in clean energy companies.
The Global Carbon Trading Index has lost about 15% of its market value in the past five weeks to a level of 18,497. Initial enthusiasm for the space (with the election of President Obama) has faded given the realities of a global economic slowdown and bear market for stocks.
With the launch of AirShares Carbon Fund (ASO) in mid-December, investors have another option to trade the price of carbon with the iPath Global Carbon ETN (NYSEARCA:GRN) (an exchange-traded note which is a debt obligation of Barclays) already on the market since last summer.
The exchange-based trading of carbon allowances in the U.S. began this past summer with the Regional Greenhouse Gas Initiative (RGGI). The 10 RGGI states in the Northeast and Mid-Atlantic have enacted a voluntary, regional cap and trade system to regulate carbon dioxide emissions from power plants.
ASO has lost about 40% of its value since it was launched by XShares on 12/15/08, with about 200,000 shares outstanding, $3M in net assets, and an average trading volume measured in hundreds. GRN has lost more than half of its value since launching last summer, with 100,000 shares outstanding, $1.8M net assets, and an average volume of less than 2,000 shares per day.
Key factors in the demand for carbon credits include overall power demand and the relationship between natural gas and coal prices since burning gas results in the release of less than half of the greenhouse emissions versus coal. Currently, the simplest way for power utilities to reduce greenhouse emissions is to convert from coal to gas. Below are the two leading global proxies for the price of carbon.
1.) European Union Allowances or EUAs (which are tradable emission credits from the EU Emissions Trading Scheme. They provide the right to emit one ton of carbon dioxide, representing about 79% of GRN) (ASO is a commodity pool fund which invests in a basket of EUAs only).
2.) Certified Emission Reductions or CERs (which are credits generated under Kyoto's Clean Development Mechanism for the reduction of greenhouse gas emissions equal to one ton of carbon dioxide equivalents, representing the other 21% of GRN).
Given the highly speculative nature for most of the companies in the Global Carbon Trading Index, investors may consider CNX Gas (CXG) as a way to gain exposure to the space without the risk of a pure-play carbon credit business model. CNX Gas is an independent natural gas exploration and production company based in Pittsburgh with operations concentrated in the Appalachian basin.
CXG has increased its acreage position by 345% over the past three years to a total of 3.8 million acres through a mix of coalbed methane (CBM), unconventional shales, tight sands, and conventional deposits concentrated (63%) in the Appalachian basin. Proven reserves account for just 7% of the 3.8 million acres, with partially-assessed and un-assessed acres accounting for 46.5% each.
CXG is the second-largest play on methane gas capture in the U.S. behind Waste Management (WMI). As the only oil and gas company registered as an offset provider with the Chicago Climate Exchange, CNX Gas has already registered 8.4 million tons of carbon credits and expects future capacity to generate 2 - 3 million additional tons annually. RGGI emission permits are trading around $3.50 per ton, which is down sharply from the mid-$5 level last summer.
The largest play on exchange-traded carbon credits is Climate Exchange (UK: CLE.L) (CXCHF.PK), which is engaged in developing financial exchanges that allow for the trading of environmental financial vehicles such as the carbon credits tracked by GRN and ASO. The Company's three main businesses include the European Climate Exchange, the Chicago Climate Futures Exchange, and the Chicago Climate Exchange.
However, Barclays (NYSE:BCS) recently announced over-the-counter trading of RGGI emission permits in the U.S., circumventing the regulated exchanges offered by the New York Mercantile Exchange and Chicago Climate Exchange. Climate Exchange has lost over 40% of its market value on a year-to-date basis with a market cap of about $330M U.S. Dollars.
Click to enlarge: