Carbon prices are rebounding and diverging from an overall decline in commodities. Since late July, the exchange-traded fund U.S. Oil Fund (AMEX: USO) has slipped roughly 10%. At the same time, the exchange-traded note iPath Global Carbon (NYSE: GRN) has surged about the same amount.
On July 31, GRN closed at $39.52. Early on Wednesday, the ETN was trading at $44.48. (Its all-time high was $54.54.)
A good signal of what's going on lately has been the plight of U.K.-based Camco International (London: CAO). On Tuesday, it recorded a $2.6 million profit on the sale of 151,288 tons of carbon credits on the spot market.
The certified emission reduction credits, or CERs, were sold to an undisclosed buyer outside of the European Union for an average price of just over 19 euros per ton versus an average acquisition price of just 7.5 euros per ton.
With CERs trading around 19.75 euros per ton on Tuesday, Camco's portfolio of carbon credits is worth over $1.2 billion at current market prices-including over 150 projects which are expected to generate 151 million CERs by 2012 (of which 41.8 million will go directly to Camco).
Another way to view this evolving story is through EcoloCap Solutions (OTCBB: ECOS). It's a tiny U.S.-traded stock (the firm is based in Canada). The company generates CERs in emerging and frontier markets such as Vietnam at a below-market cost and then sells them at higher spot market prices in developed countries such as the U.S.
EcoloCap is focusing its initial efforts in Vietnam and China (which account for over half of all earned carbon credits followed by India at around 10%) through an extensive network of contacts in Eastern Asia-leveraging upon its technical expertise in the implementation of clean energy projects and experience in obtaining United Nations certification for these projects.
EcoloCap currently has a total of seven signed renewable energy projects which will generate an estimated $39 million in revenues (versus a market cap of just $21.5 million) and $15 million in cumulative cash flow through 2012. Those are in addition to tradable carbon credits.
As a pioneer in North America and a pure-play on the generation of carbon credits at below-market prices, EcoloCap could offer a unique opportunity for investors. Unfortunately for index-minded investors, GRN doesn't own any companies. For one reason, less than a handful of pure-plays exist in the space. As a result, GRN's index is a debt instrument with most of its exposure to European Union Allowances.
Those are the actual credits that trade in Europe. These carbon credits are traded by companies who get tax breaks and other incentives for lowering pollutants into the air, as well as investors and speculators who want to participate in the global reduction of greenhouse gases.
Small Players, Big Role
But with such a small field, the performance of GRN and a host of other exchange-traded products likely to come out tracking carbon emissions, the price of this new commodity is likely to greatly be impacted by small players like EcoloCap.
Although small right now, the longer-term prospects for these companies appear to have some legs. For example, the clean energy projects signed by EcoloCap thus far in China and Vietnam enjoy long project life cycles lasting up to 20 years-ensuring a steady supply of carbon credits while the company continues to sign new projects on top of existing ones to fuel its growth.
Just like an oil company bases its worth on proven reserves in the ground, companies such as EcoloCap, Camco and EcoSecurities Group (LSE: ECO) can base their worth on the carbon credits generated over the entire life cycle of each project.
Another upside factor to consider in this market is the underlying price of the commodity itself (carbon), which analysts expect to rise steadily over time.
The head of environmental markets at Barclays Capital has predicted that carbon credits could become not just the world's biggest commodity market, but the biggest market overall. Some analysts are predicting a total marketplace for carbon emissions of $1 trillion within a decade.
Right now, the European Union Emission Trading Scheme is the largest market for the trading of emission allowances, spanning 28 countries throughout Europe. Other developed countries such as the U.S., Japan and Australia are developing similar ETS markets.
Mike Havrilla is an index developer based in Portage, Pa. He can be reached through his blog or firstname.lastname@example.org
Smart beta isn’t smarter than cap weighting, but it is different, and that’s great for investors.
Trial by fire is one way to discover why ETF transparency matters.
Most people now realize leveraged ETFs can hurt you, but how, then, to use them?
What would a shift out of a mutual fund and into an ETF look like up close?