The fight against global warming is making carbon emissions the hot new commodity.
According to a February report from New Carbon Finance, a research provider for global carbon markets based in London, the United States could have a $1 trillion domestic carbon emissions market by 2020 if it develops a comprehensive "cap and trade" program.
"Cap and trade" is a trading scheme whereby emitters are given quotas in the form of tradable emissions permits. Emitters that exceed their quotas can then buy extra permits from those emitting below their quotas.
In some countries, such carbon markets are government-mandated, while in the United States and others, the market is voluntary.
For the past few years, the Chicago Climate Exchange has been alone in handling trades for the U.S. carbon market, but it is getting company. On March 17, The Green Exchange — a New York-based joint venture of the New York Mercantile Exchange and Evolution Markets, an environmental brokerage based in White Plains, N.Y. — began trading emissions futures and options.
Another player may be on the horizon, as Bluenext, a Paris-based joint venture that was launched in December by NYSE Euronext and French bank Caisse des Depots, is planning to expand to North America.
SRI INTERESTThe emerging carbon markets are catching the attention of the socially conscious investment community. The concept of emissions trading was a featured topic at the popular "SRI in the Rockies" conference last November. Another market mechanism also of interest to socially conscious investors is carbon offsetting, which involves paying for pollution reduction elsewhere, often involving projects in developing countries, to offset one's own pollution. Before retail investors can participate in the carbon market, there are serious hurdles to overcome, said Shane Johnston, an adviser with San Diego-based Blue Summit Financial Group, which specializes in socially conscious investing and manages $80 million in assets.
One challenge "is the creation of a regulatory body for measuring, verifying, trading and enforcing transactions," he said. "It's going to be a tremendous cost and bureaucracy."
Mr. Johnston advises clients who are interested in global warming reduction to look at more established markets, such as alternative energy.
Greg Singleton, senior analyst with Point Carbon, a research and consulting firm based in Oslo, Norway, suggested that retail investors also may invest in companies developing carbon offset projects, though very few are publicly traded now.
In a related vein, retail investors also may look to the so-called cleantech industry, which focuses on using technology to mitigate environmental impact.
"Cleantech companies provide the tools for these [carbon offset] projects, in areas such as wind turbines, solar cells and geothermal systems," said Rafael Coven, managing partner of Cleantech Indices LLC of Baltimore.
His company's Cleantech Index United States comprises 47 cleantech-focused companies and is tracked by the PowerShares Cleantech Portfolio ETF.
Future retail products are in the works. New York-based XShares Advisors LLC filed a registration statement with the SEC in August to offer exchange traded fund shares in carbon emissions futures through the AirShares EU Carbon Allowances Fund (InvestmentNews, Aug. 15).
Mr. Singleton expects to see carbon mutual funds in the future, organized by major investment banks. But the nascent movement has its critics.
"Carbon trading has no legs. The government is creating a synthetic market," said Paul Sutherland, chief investment officer of Traverse City, Mich.-based Utopia Funds.
"How do you regulate the industry? It's a feel-good thing — and it's going to create windfall profits for some companies," Mr. Sutherland said.
"The most rational path is to [invest in companies that] reduce dependence on fossil fuels," he said.
Utopia Funds has positions in wind, biomass, solar, natural gas and cleantech technologies, Mr. Sutherland said.
Nevertheless, "pending legislation may force a market," he said of Point Carbon, which published a report this month on the Lieberman-Warner bill now in the Senate.
"The bill suggests establishing an emission trading scheme covering around 75% of greenhouse gas emissions in the U.S.," the report said. "If it becomes a reality, this will be the largest emission trading scheme in the world."
In addition, the Regional Greenhouse Gas Initiative, a cooperative project of 10 states in the Northeast, will be coming to market next year with a multistate cap-and-trade program and a market-based emissions trading system.
A bigger market driver will be a cap-and-trade market expected in about four years that will come about as a result of the Western Climate Initiative. The program is a partnership that includes seven western states, including California, and two Canadian provinces.
"As these regulatory systems evolve, you're going to have interest from the financial sector in creating financial institutions to leverage opportunities within these markets," Mr. Singleton said.