Tidbits from the World of Carbon Emissions Trading

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To be sure, the near-term prospects for carbon emissions trading are bleak. Continued decline in industrial production across the world’s major manufacturing economies will inevitably lower carbon emissions. The clearest indicator of this, short of directly measuring emissions, is a sharp decline in the price of various fossil energy commodities (i.e. oil, natural gas and coal) on the back of falling demand.

Another important factor for carbon emissions trading is that the commodity in play - the regulatory right to emit a unit of carbon dioxide equivalent (CO2e) - derives its legitimacy entirely from a regulatory scheme rather than from an economic need. Placing faith in carbon markets therefore means placing faith in politicians. The next 12 to 18 months are unlikely to produce much in the way of vigorous environmental action on the part of government (barring subsidies for alternative energy related to the stimulus package), especially if it means additional costs on industry.

These headwinds didn’t prevent XShares Advisors from launching a new carbon emissions ETF, the AirShares EU Carbon Allowances Fund (ASO). ASO is an interesting product - it’s a commodity pool that holds long positions in emission allowances under the European Emissions Trading Scheme.

Disclosure: None