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New ETF Tracks The Global Carbon Market

New ETF Tracks The Global Carbon Market
December 16, 2008

SAN DIEGO ( - Just a few months ago, the topics of global warming and emission of greenhouse gases lead to many heated discussion. But as the price of crude oil (NYSEarca: USO) dropped by over 70%, interest in alternative energy investing cooled off as well.


The idea of carbon emission credits seems to have gathered more steam in Europe than the United States. Nevertheless, there are two U.S. listed exchange-traded products that track this new market.


XShares Advisors just launched the new AirShares EU Carbon Allowance Fund (NYSEarca: ASO). This new ETF directly competes with the iShares Global Carbon ETN (NYSEarca: GRN).

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The carbon market is rather complicated, so let me explain briefly. ASO and GRN track the price of carbon emission credits. As carbon emissions are limited, “dirty” companies need to buy additional credits if their emissions exceed their allowance. “Clean” companies on the other hand, can sell unused carbon emission credits for cash.


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ASO is a commodity pool that seeks to provide investors with exposure to the performance of a basket of exchange-traded futures contracts for European Union Allowances (EUAs). An EUA is an entitlement to emit one metric tonne of carbon dioxide equivalent that is transferable under the European Union Greenhouse Gas Emissions Trading Scheme (EU ETS).


ASO’s portfolio holds unleveraged long positions in European Climate Exchange Carbon Financial Instrument Futures Contracts (ECX CFI Futures Contracts). The EUA futures contracts ASO invests in expire in December of years 2009-2012. As contracts approach their December expiration, the fund sells expiring contracts and replaces them with contracts of later expirations.


While categorized as an ETF, ASO is not a pure-bred ETF and differs in structure significantly from GRN.


GRN is part of Barclays iPath line-up of products and as such an exchange- traded note. ETNs are unsecured debt notes, in this case debt of Barclays Bank, PLC. As such, investors assume the risk that the issuing financial institution will be able to pay the ETN's performance return minus its fees.

ETNs have lost a lot of credibility due to this year's financial crisis and the failing of once thought to be solid financial institutions such as Bear Stearns and Lehman Brothers. (click here for a comparison of ETFs vs ETNs.)

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GRN has lost about 40% since its inception in 2008 and has fared better than many alternative energy ETFs such as the PowerShares WilderHill Clean Energy ETF (NYSEarca: PBW) or Market Vectors Global Alternative Energy ETF (NYSEarca: GEX). Nevertheless, an investment in clean energy companies, as represented by the above ETFs, provides are more direct link to this noble and obscure sector.