Monday, June 30, 2008

An Interesting Way to Play Global Warming - Carbon Credits? iPath Global Carbon ETN (GRN)

There has been a literal avalanche of new ETFs and ETNs the past year, and even the past quarter - especially of the commodity kind. Most of which are uninteresting to me, but a few that have piqued my interest - I am probably missing others simply because so many seem to be coming out by the week/month. I have a few I am trying to write longer pieces on but have not had the time to devote to do them justice, but one ETN I wanted to point out is iPath Global Carbon ETN (GRN). And instead of recreating the wheel, I'll lean on a nice summary by Roger Nusbaum who specializes in ETFs/ETNs over at Myself? I have no idea how these will trade so I wouldn't touch them with a 10 foot pole, but maybe in a year from now if we see how the market develops and the ETN trades it might be something to revisit.
  • The most interesting might be the iPath Global Carbon ETN(GRN ), a way to access the carbon trading market. GRN tracks something called the Barclays Capital Global Carbon Index Total Return. It will have a 0.75% annual fee and will not pay out any interest.
  • Barclays provides a report on the iPath Web site -- and even if you have no interest in GRN for an investment, learning about the greenhouse gas issue is important.
  • There is an increase in greenhouse gas emissions stemming from greater use of fuels like oil and coal in the running of businesses and other entities around the world. One solution to this problem is to tax (sort of) companies that exceed pollution allowances and reward companies that do not.
  • The rules for this stem from the Kyoto Protocol. Companies must buy carbon credits in the open market to "pay" for the excess pollution, which is pollution beyond specified allowances. Carbon credits can be bought from companies that do not exceed their pollution limits, or from speculators in the open market.
  • GRN strikes me as the first of its kind. As opposed to providing access to a stock market or a commodity, it instead offers exposure to a real world cost of doing business globally. As such, it seems like a real candidate for having a very low correlation to equities.
  • GRN should be expected to be very volatile. Because this is a first-to-market type of product, it makes sense to give GRN some time to let it prove that it can in fact be a proxy for the carbon market.
  • Now to bring in a little politics, people who do believe global warming is a problem might be inclined to view GRN as a one-way trade. The folks who are not concerned about global warming would view this is a poor investment.
  • Even if the skeptics are right about the importance, it would seem that news flow and awareness will only increase, which provides a tailwind -- but not a one-way trade -- for all carbon indices.
  • One last thing: GRN is a debt obligation of Barclays PLC (BCS), the same Barclays whose stock price is down 40% year to date. I think a failure of Barclays is extremely unlikely, but anyone considering one of the iPath ETNs needs to follow the story.
No position

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