Sunday, October 11, 2009

How to Invest in the Future of Carbon Credit Trading

What Do the Following Have In Common?
* Arnold Schwarzenegger
* Al Gore
* The band Coldplay
* Leonardo DiCaprio
* Jake Gyllenhal
* 2008 Oscars

What They Have in Common: They all claimed to have offset their fossil fuel usage by purchasing carbon credits.

Personal carbon credit trading may not have reached the big time yet, but business carbon credit trading is big business. For example, $118 billion carbon credit contracts were traded in the U.S. 2008, with $150 billion expected for 2009. But trading in the U. S. is still small compared to Europe.

A boost to carbon trading may come from the American Clean Energy and Security Act of 2009 (Waxman-Markey bill) would take effect 2012, and was recently passed by the House. The bill would limit, or "cap," the amount of carbon emissions that companies can produce each year.

One way to invest in carbon trading is through CME Group Inc. (CME), the holding company for the Chicago Mercantile Exchange. They traded 133,175 environmental contracts in June 2009, which was record trading volume for them. They trade carbon emission reduction futures contracts and sulfur dioxide futures and options.

They are also setting up the CME Green Exchange, which is a separate entity, designed as a partnership with major financial institutions. Their partners include Morgan Stanley, Credit Suisse, Goldman Sachs, JPMorgan, Merrill Lynch, and Constellation Energy. They would be trading the same environmental contracts and awaiting CFTC approval.

CME Group has a forward P/E of 19 and pays a yield of 1.6%. The Price to Book value is 1.00.

NYSE Euronext (NYX) is a limited way of playing the carbon trading market. They own 60% of BlueNext, a European Environmental Exchange, which trades 5 million tons of carbon emissions a day. The NYSE has a forward P/E of 12.3 and pays a yield of 4.2%. The Price to Book value is 1.11.

A pure play is Climate Exchange PLC (CXCHF.PK). This is a very volatile stock that has traded between 5.75 and 39.50 during the last twelve months. The company owns the European Climate Exchange and the Chicago Climate Exchange. They claim to be North America’s only voluntary, legally binding greenhouse gas reduction and trading system. The exchange trades carbon sources in North America and Brazil. The exchange was founded in 2003 and trades carbon dioxide, methane, nitrous oxide, sulfur hexafluoride, perfluorocarbons and hydrofluorocarbons.

10% of the company is reportedly owned by the Generation Investment Management, a investment firm founded & chaired by former vice president Al Gore. The CEO is David Blood, former top executive of Goldman Sachs Asset Management. This has generated the nickname for the company, "Blood and Gore." Climate Exchange PLC has an extremely low volume of trading and trades on the Pink Sheets.

The Chicago Climate Exchange has hundreds of major corporations as members including Amtrak, the City of Chicago, DuPont (DD), Ford (F), Motorola (MOT), and the City of Oakland. They also have a division called the Chicago Climate Futures Exchange, which is a wholly owned subsidiary of the Chicago Climate Exchange. The CCFE is a CFTC designated contract market which offers standardized and cleared futures contracts on emission allowances and other environmental products. For the first half of 2009, trading increased by 111% over the first half of 2008 and a 27.5% increase over full year of 2008.

Another way to play the carbon trading market is through the Exchange Traded Fund, iPath Global Carbon ETN (GRN), which is technically an Exchange Traded Note. This ETN has a goal of tracking the Barclays Capital Global Carbon Index Total Return, which measures the performance of the most liquid carbon-related credit plans, including the European Union Emission Trading Scheme and Kyoto Protocol's Clean Development Mechanism. The volume of trading is extremely low.

Author owns NYX and F.

By Fred Fuld at

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