Sunday, December 28, 2008

So You Want to Be a Carbon Trader...? (ASO; GRN)

UPDATE below.
Original post:
And you're not on a carbon desk? Never fear! The Wall Street marketing machine is geared up to supply anything you could ever desire.

First though, a word of explanation.
I once estimated that I had read 100,000 pages of climate science, economics, policy and politics.
This has helped form my personal belief that carbon trading is not going to lower world temperature by even a half-a-degree.

For example, in an October 1998 article in Nature, Martin Parry (Co-chair of the IPCC's Working Group II) said the effect of the Kyoto Protocol (and it's associated carbon trading, CDM etc. [articles 6,12 and 17 of the protocol]) would be a reduction of –0.05°C by the year 2050.
Tom Wigley of the National Center for Atmospheric Research estimated that Kyoto would result in a reduction from baseline of 0.06°C to 0.21°C . (under one Kyoto scenario 0.06 to 0.11°C, under another 0.11 to 0.21).
As Warren Buffett said (in a slightly different context):
"Now I'm known as a long-term investor and a patient guy, but that is not my idea of a big move."
My personal preference, if we are going to go this route, is a carbon tax with a 100% return of the proceeds to the taxpayers. But who cares what I think.
To quote Edmund Burke*:
"All which a man without authority can give--His unbiased opinion, his honest advice, and his best reasons."
-Edmund Burke (1791)
*Described by Edward Gibbon (he of The...Decline and Fall...) "The most eloquent and rational madman that I ever knew".

As a kid I was pretty good at "Let's pretend" and if we go with carbon trading in the U.S, I am fully prepared to make money off it. So let's take a look at a couple new tools.

One of the perverse effects of the European Emissions Trading Scheme is that the colder it gets, the higher the price of carbon. This is because more fossil fuels are used, and carbon emitted. Let's say you think Europe will experience some of it's coldest weather in thirty years by mid-January 2009 and you're not a big enough player to buy European EUA's directly,
24 Dec 08
DEC 2009

Last 30 days

Point Carbon EUA OTC prices last 30 days
chart via PointCarbon
In October, IndexUniverse told us "ETF Securities Lists Europe's First Carbon ETC":

ETF Securities Limited is about to list the world’s first Carbon ETC on the London Stock Exchange (LSE) in the dedicated ETC segment. ETFS Carbon offers investors the opportunity to gain direct exposure to the carbon emissions allowance futures market. It is expected that the first day of trading will be Thursday 30th October.

ETFS Carbon (LSE Code: CARB) is designed to track the ICE ECX EUA Futures Contract, which is currently the most liquid exchange traded contract within the EU Emissions Trading Scheme (“EU ETS”). Each ETFS Carbon is initially equivalent to one emissions allowance; the holder of an emissions allowance owns the right to emit one tonne of carbon dioxide equivalent gas. On the LSE, ETFS Carbon will trade in both Euros (CARB) and also in British pence (CARP) on the London Stock Exchange. Each ETFS Carbon will begin trading at approximately EUR 18.37 (£14.74)....MORE

On December 15 they came back with "Second Carbon ETC Launches In U.S.":

The second exchange-traded product providing access to global carbon emissions markets is set to launch Monday in the U.S., bringing an alternative to a much-discussed new asset class that's also spreading through Europe.

The AirShares EU Carbon Allowances Fund (NYSE Arca: ASO) is actually a commodity pool that tracks a basket of exchange-traded futures contracts for European Union Allowances (EUAs). Each contract provides for delivery of 1,000 EUAs at a specified price.

The new ETF-like product, as AirShares refers to ASO, invests in futures contracts that expire each December beginning in 2009 and extending through 2012. As contracts approach their December expiration, the fund sells expiring contracts and replaces them with contracts of later expirations, according to XShares Advisors, which is sponsoring the new exchange-traded products.

ASO will start with nearly $5 million in seed money as an asset base. It's expected to come with an expense ratio of 0.85% annually. The fund opens with some 238 different contracts. More detailed information can be found on the new AirShares site here.

Since the commodities involved aren't physically deliverable, ASO can't be considered an ETF. But it acts like many exchange-traded commodities products that are popular in Europe. It's also important to note ASO represents a pool of futures contracts rather than notes.

That's significant since another type of fund, referred to as an exchange-traded note, is already on the market. In late June, Barclays Capital gained first-mover status into the U.S. exchange-traded products market for carbon emissions with its iPath Global Carbon ETN (NYSE Arca: GRN)...MUCH MORE, read it all.

Speaking of GRN, it's performance since introduction may be a cautionary tale:

intraday 6 month 12 month 24 month
chart via etfguide

Be aware of what you're getting into (Investors Business Daily via Yahoo Finance):

...Given the low interest in GRN, Ron Rowland, founder of All Star Investor and chief investment officer of Capital Cities Asset Management, with $80 million in assets under management, believes ASO will shut down within a year.

"I don't think the typical investor understands what European Union Allowances are or what the European Union Emissions Trading Scheme is all about," Rowland said. "ASO also has the problem of being a commodity pool, which is another hurdle to gaining acceptability and comfort from consumers."

Just as you own your gains, you also own your losses. (unless you accept this position, via OilVoice):

Senior Trader
The Function:

Trading Team (Front Office). The Trading Team is responsible for managing the company’s power, gas and carbon positions in the relevant wholesale trading markets. The Trading Team manages the company’s longer term positions, both in regard to proprietary trading and customer initiated transactions, and provides a point of contact for some of the company’s largest clients. The Trading Team is tasked with delivering against an annual profit target, while operating in accordance with the relevant defined risk parameters.


2-3 years trading experience in the UK power, gas and carbon markets, gained in a similar role within an energy trading company. Experience of leading the development and implementation of speculative trading strategies and tactics with accountability for delivery against an annual profit target. A detailed understanding of the fundamental drivers of the UK power, gas and carbon markets....
UPDATE: When I typed "Let's say you think Europe will experience some of it's coldest weather in thirty years by mid-January 2009..." it wasn't a hypothetical scenario, we were looking at the weather forecasts last week. A couple hours ago a reader emailed this London Times story:

Wrap up - Met Office warns of Siberian blast and freezing weather

It’s time to get out the thermal underwear and thickest pullovers – Britain is set for shockingly cold weather for at least the next couple of weeks.

After a glorious Christmas, with not a hint of a snowflake, temperatures have been slipping steadily downwards, with minus 11C (12F) recorded in Aviemore, in the Highlands, on Saturday night.

The plunge into a Siberian blast of cold will worsen in the coming week as raw easterlies freeze the country. “This coming week, maximum daytime temperatures will be between 2C (36F) and 4C (39F) but temperatures at night could be well below zero for many places,” said Stephen Holman, forecaster at the Met Office....

...In winter, low pressure tends to dominate over Iceland and high pressure to the south, over the Azores. These two pressure systems dance in tune with each other and drive our winter weather, in what is known as the North Atlantic Oscillation (NAO). When the Icelandic low and Azores high are strong, they steer wet and mild weather over the UK; but when they slacken off in a negative phase, that turns the UK bitterly cold. At present the NAO is turning negative, sending a powerful signal that the weather is set to continue cold.

How bad could this winter sink? The weather maps are a chilling reminder of some our most savage winters, such as the notorious 1962-63 winter, the coldest for 180 years. This was when the sea froze around the coast of southeast England and crops were dug out of frozen ground with pneumatic drills and blizzards paralysed the nation.

Even if next month is freezing, the Met’s long-range forecast predicts that the winter will melt away into warmer conditions in February....MORE