ETFs Could Benefit from Asian Carbon Trading

With global carbon trading growing at a quick clip, Asian economies are looking to join in on the action, and exchange traded funds (ETFs) are sure to track this market entry. There is a growing recognition of carbon as a soft commodity that can be traded as carbon credits in the form of other financial products, such as ETFs and derivatives.

As carbon trading grows exponentially, many of the Asian financial centers have taken notice. Hong Kong, Tokyo, Singapore, Mumbai, Shanghai and Beijing have all considered opening exchanges for trading carbon credits. However, analysts believe that it may be to early for Asia to create these sort of exchanges unless local demand for carbon credits is created.

As Rajesh Chhabara for ClimateChangeCorp reports, China alone accounts for nearly 61% of the global supply for carbon credits, with India following at 12%. These two countries along with Malaysia, Thailand, and South Korea together generate the vast majority of the world’s carbon credits at a staggering 80%. Despite this enormous supply of carbon credits, local demand in Asia is nearly nonexistent and almost all carbon credits are currently purchased by European companies and governments to meet their own reduction targets and regulations.

Many market analysts, however, are skeptical about the carbon trading vision in Asia. Although the supply is present, there really exists no local demand with the exception of Japan. Other Asian countries still do not have regulations requiring companies to reduce carbon emissions or buy carbon credits.

The iPath Global Carbon ETN (GRN), started trading on June 24, 2008 and is down 12.9% over the past month. This ETN expects to incorporate new carbon-related credit plans as they develop around the world, which would include Asia entering into this market. When this fund launched, we explained how the global carbon credit market operates.