this week launched an array of exchange traded notes (ETNs), and one of
the most interesting is the first such note linked to carbon credits.
The iPath Global Carbon (GRN)
is designed to provide investors with exposure to the global price of
carbon credits. The fund is so timely as the debate about global
warming (ahem) heats up.
Philippe El-Asmar, head of solution sales, Americas, at Barclays Capital, and
Steve Schleimer, director of energy and environmental regulation at
Barclays Capital, told us a little bit about ETNs in general and how the value
of carbon credits can be captured in an exchange traded product.
Schleimer says the European Union is currently the only market with
a carbon trading system. How carbon allowances work is on a "cap and
trade" system in which the government will set emissions limits, which
are then allocated to various parties. If emissions
are capped, for example, at 100 million tons a year, the entities that
want to emit are free to trade their rights among themselves.
An entity that goes over the limit may find itself in the position
of having to buy more tickets, and entities that find themselves under
the limit will sell theirs, and thus, a market is born. If you’ve gone
over the limit and don’t have the allowances, you get socked with a big
penalty, so even if an entity could buy an allowance, there’s still an
incentive to not go over in the first place.
In the EU, each country has a target emissions level which will
decrease over the next four years. The United States is due to launch a
state-level cap and trade plan in 2009, along with a federal cap and
trade plan by 2012.
There are also "offset credits," which are credits entities get for
making emissions reductions. Those can be sold to entities in the EU
needing allowances. The index, Schleimer says, is an averaging of
allowance prices and prices people are paying for credit projects.
These offset credits came out of the Kyoto Protocol in 1997.
Countries that ratify the protocol are either classified Annex 1
(developed) or Annex 2 (developing). Annex 1 countries are required to
reduce greenhouse gas emissions to levels specified for each of them in
the treaty, while Annex 2 countries have no obligation outside of
monitoring and reporting emissions.
However, if an Annex 2 economy implements a reduction project, it
will receive carbon credits, which can be sold to Annex 1 buyers.
ETNs have exploded in their two years of existence, El-Asmar says.
Since Barclays launched the first iPath ETN in 2006, the number of providers has
grown to 11.
"ETNs are meant to give access to harder-to-reach markets," he says.
"What we do is work with our sister company, Barclays Global Investors, and prioritize, to look at
the existing suite of ETFs and try to be complementary."
The other 10 ETNs launched by Barclays are:
- iPath Dow Jones-AIG Tin Total Return Sub-Index (JJT)
- iPath Dow Jones-AIG Sugar Total Return Sub-Index (SCG)
- iPath Dow Jones-AIG Softs Total Return Sub-Index (JJS)
- iPath Dow Jones-AIG Precious Metals Total Return Sub-Index (JJP)
- iPath Dow Jones-AIG Platinum Total Return Sub-Index (PGM)
- iPath Dow Jones-AIG Lead Total Return Sub-Index (LD)
- iPath Dow Jones-AIG Cotton Total Return Sub-Index (BAL)
- iPath Dow Jones-AIG Coffee Total Return Sub-Index (JO)
- iPath Dow Jones-AIG Cocoa Total Return Sub-Index (NIB)
- iPath Dow Jones-AIG Aluminum Total Return Sub-Index (JJU)
In other commodity-linked ETN news, HSBC USA is set to launch a family of Elements exchange
traded notes (ETNs) to trade on the NYSE Arca. The S&P Commodity
Trends Indicator-Total Return takes a long-short approach to the
market, and is a diversified composite of 16 physical commodities
futures, grouped into six sectors, reports ETF Express.
Every sector is positioned long or short, except energy which is
placed long or flat, and this is based on its price movement relative
to its exponential moving average.Investors will benefit from both the
ups and downs of the price movements subject to trends in commodities.
The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.