New Merrill Lynch Index Tracks Carbon Credit Markets

April 04, 2008

The carbon trading market is just getting started.

With the effects of global warming gaining increasing global attention and being addressed with new urgency, financial firms have delved into the field to offer analysis, indexes and investable products such as exchange-traded funds. Most recently, Merrill Lynch launched a carbon emissions benchmark. The MLCX Global CO2 Emissions Index tracks two types of emissions contracts-European Union Allowance (EUA) contracts established under the European Union Emission Trading Scheme, and Certified Emission Reduction (CER) contracts that are part of the Kyoto protocol.

An emissions trading scheme sets a limit on the amount of a pollutant that can be released into the atmosphere and allocates credits among companies that create those emissions. The companies can then trade these credits among themselves-those that do not use all their emissions credits can sell them to companies that need them. A recent Reuters article said the international carbon market was worth about $60 billion in 2007.

The two types of contracts have equal standing in the index, but component weightings are based on liquidity. Also, Merrill calculates a subindex for both contract types. According to Reuters article, CER contracts represent about 29% of the index, while EUA contracts represent about 71%. However, the global carbon credit market is still in its early stages, and as other types of emissions contracts begin trading, the firm will add them to the broad emissions index as well.

An Investor's Business Daily article said that the firm had created the indexes with the intention of them being used to underlie investable products, like ETFs.

"The MLCX Global Carbon emissions indices are an important addition to our growing suite of carbon finance and environmental sustainability solutions and have come in response to strong demand from our institutional, asset management, and wealth management clients who seek exposure to the rapidly growing global carbon market," said Abyd Karmali, the managing director and global head of carbon emissions markets at Merrill.


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