Stock options, move over and make room for “carbon credits” please.
Technically speaking, “carbon credits” (CC) are not true “derivatives” of course since, unlike stock options, they do not have an “underlying asset” or “instrument.”
A “carbon credit” is basically the “right to pollute” sold by those less-polluting companies to those who do not, for one reason or another, want to curb their carbon dioxide emissions yet. Their prices probably rely more on the laws passed by legislative bodies in respective parliaments than on net corporate worths, any technical ratios or interest rates.
The market to buy and sell such credits is especially hot in Europe where most countries have signed the U.N. Kyoto Protocol to curb CO2 emissions. The United States as of March 2007 still has not signed the Protocol.
Since to sell these credits as individual companies you need to register your energy-saving and carbon-suppressing projects with the United Nations and get U.N. certification, the U.S. companies cannot yet do that directly. That’s why London is right now the busy hub of the $25 billion carbon credit trading market where 60% of all transactions take place – compared to only 10% in the U.S.
However, the U.S. investors already do participate in this new exciting market through various hedge funds that play at the 200-member Chicago Climate Exchange, Inc.
The pressures to sign the Kyoto Protocol and to participate more directly in the world-wide carbon credit trade comes from major states like California.
Gov. Arnold Schwarzenegger has signed in September 2006 a law that mandates cutting down the CA carbon emissions by 25% as of 2020. This would of course increase the attention paid to CC trading as well since it is a lucrative way to self-finance many alternative energy projects.
A major development to spur Washington in that direction would be the launching of a carbon credit exchange soon in Beijing, China. I’m sure we are witnessing only the beginning of a brand new trading sector that will make itself felt strongly in the months and years ahead.