AirShares: The New Carbon ETF, Sort Of (ASO)

There is a new ETF in town, or at least a vehicle that is like an ETF, and this one tracks carbon allowances.  AirShares™ EU Carbon Allowances Fund (NYSE Arca: ASO) began trading on the NYSE today. It was launched by XShares Advisors LLC, and this is the first US-traded product that can give exposure to the carbon market by holding European Union Allowances (EUAs) futures contracts.

Technically, a commodity pool and not an ETF.  AirShares seeks to provide results similar to the performance of a basket of four carbon credit futures contracts expiring December 2009 to 2012.  These carbon credits are certified by the European Union, issued by the European Union Emissions Trading Scheme (EU ETS), and allow the holder to emit one metric ton of CO2. 

This instrument can also be bought by individuals or institutions andwill allow individuals to not be required to set up a margin account topurchase the fund.   Because of the ETF-like construction, institutionswill be able to consider AirShares as an equity.

According to the World Bank, EUAs made up 78% of the value of thecarbon credits traded on the open market in 2007.  Thegovernment-issued EUAs that compose AirShares trade on the EuropeanClimate Exchange (ECX) in London.  In 2007, trading volume on ECXrepresented 83% of the total trading value of the EU carbon market. 

During the first nine months of 2008, the global carbon market grew 81%to $87 billion and is on track to clear $100 billion by year end,according to New Carbon Finance research released this October.  A Mayreport by Point Carbon expects the global carbon market to grow to $3trillion by 2020, assuming the U.S. develops a trading emissionsprogram.

ASO’s portfolio initially holds unleveraged long positions in ICEFutures or European Climate Exchange Carbon Financial InstrumentFutures Contracts.  AirShares is a passively managed equity product anddoes not track an index and it also seeks to hedge the currency riskassociated with fluctuations in the Euro/U.S. dollar exchange rate asthe futures contracts held by the fund and most of its assets aredenominated in Euros but these shares trade in U.S. dollars.

We would like to point you to a couple of sites before you start tryingto dig into a European exchange site.  One exchange we have used totrack these carbon certificates is the Chicago Climate Exchange.Americans may get a more simple understanding of some carbon basicsthere and then it will be easier to understand what the Europeans aretelling you.  You can also look at the Carbonfund.org site to get additional data for here in the U.S.

The good news is that investors can now get access to the carbonmarket.  The bad news is that this sounds like one of the morecomplicated exchanged-traded instrument structures, and that mightinfluence the demand and therefore the liquidity.  It really is notthat complicated at all, but it sounds complicated.  We have spoken onand off with some who are involved in these markets.There seems to be a concern that some feel the carbon market could fallvictim of the current liquidity and economic crisis seen in allcountries right now.  Many fear that the recession will trumpenvironmentalism. 

Jon C. Ogg
December 15, 2008