Tuesday, May 19, 2009

Carbon trading: world's next biggest market

Almost two years ago, the New York Times ran a rather visionary article which quoted Louis Redshaw, head of environmental markets at Barclays Capital, claiming that "carbon will be the world's biggest commodity market, and it could become the world's biggest market overall."

photo of Beijing in smogCurrently valued at over $60 billion, the carbon credit trading market is set to skyrocket to over $1 trillion as the price of carbon becomes more and more valuable, and the US joins the world in cap-and-trade regulation this year.

This is an institutional market, played by the large polluters, major financial institutions, and some hedge funds. For retail investors, the easiest way to benefit from this huge market is to invest in companies that gain from reduced emissions simply by the nature of their business. Companies that generate clean energy would benefit by selling both their power and the carbon credits they acquired while producing it. ETFs are bound to appear sooner or later.

The Montreal Climate Exchange (MCeX) - Trading Canada carbon dioxide equivalent (CO2e) units. Each CO2e unit is defined by the Government of Canada as an entitlement to emit one metric ton of carbon dioxide equivalent.

The system proposed by the Canadian government is based on the allocation of units to a company for exceeding its intensity-based greenhouse gas (GHG) emissions reduction targets. CCX chart

GHG emissions (carbon dioxide, methane, nitrous oxide, hydrofluorocarbons, sulphur hexafluoride, and perfluorocarbons) are calculated based on the equivalent quantity of CO2 required to produce a similar warming effect.

The European Climate Exchange (ECX) - Trading European Union alowances (EUAs) and Certified Emission Reductions (CERs). Each EUA is an entitlement to emit one tonne of carbon dioxide equivalent gas. Trading on ECX began in April 2005.

The Chicago Climate Exchange
(CCX) - Trading Carbon Financial Instrument (CFI) contracts, each of which represents 100 metric tons of CO2 equivalent. CFI contracts are comprised of Exchange Allowances and Exchange Offsets.

The Chicago Climate Futures Exchange
(CCFE) - A subsidiary of CCX, it's a derivatives exchange for futures and options contracts on emission allowances and other environmental products.

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