Jeffrey Feldman is one of the first people to create a retail-investing product that aims to deliver returns from business and government initiatives to slow climate change.
Feldman, who founded New York-based Xshares Group in 2005 with other financial professionals and serves as its chief strategist, hopes more people will take notice of the firm's AirShares EU Carbon Allowances Fund (ASO) after Xshares rings the opening bell on the New York Stock Exchange this Wednesday, January 28. Launched on December 15 at $25 a share, ASO had total net assets of $3.73 million and closed at $19.12 per share on January 22.
Investors will need to spend more time than that though if they want to understand this fund, how it relates to climate change and whether it's a good addition for their portfolio. ASO participates through futures contracts in the European carbon trading market, but its investment universe and possibilities for growth will increase dramatically if such a mandatory system is started in the United States-a prospect that has a much greater chance of happening now that President Obama is in office.
However, it's no surprise that the economic crisis has made people risk averse and much less willing to commit their dollars to many investments, especially ones based on new ideas. How long that will continue is anybody's guess. But Feldman believes that as the economy picks up, investors will focus more on environmental-related opportunities. "Too much of investing is done in the moment; I call it the arrogance of the presence, whatever is going on right now. If you step back and look over a 10-year period you get a difference picture. ... In the continuum, there has been an accelerating movement toward concern about the environment, about cleaner energy. It's an unmistakable trend."
So how does AirShares EU Carbon Allowances Fund work? If you are like me, first you need a quick refresher on climate change. Simply put, scientists say that global warming has caused all sorts of nasty things to happen and the problem is accelerating. The federal Environmental Protection Agency says rising temperatures already have caused shrinking of glaciers, thawing of permafrost, later freezing and earlier break-up of ice on rivers and lakes, lengthening of growing seasons, shifts in plant and animal ranges, and earlier flowering of trees. Scientists say six greenhouses gases, including carbon dioxide (CO2), primarily cause global warming. Most of the global warming caused by humans comes from CO2, and that's why it's the most heavily targeted of greenhouse gases for reduction. Human activities such as fossil fuel combustion and deforestation have increased CO2 in the atmosphere by approximately 30% since the industrial revolution, according to Communities, Conservation And Markets, a Washington organization that supports sustainable agriculture and conservation.
"Cap and trade" systems are one way being used to reduce CO2 emissions. Basically, they work like this: A government or regulatory organization sets limits on the amount of CO2 that can be emitted in a given area. Companies get a certain number of credits or permits that allow them to emit CO2, but if they don't need them all they can sell them to others who do. A mandatory cap-and-trade system, the EU Emissions Trading Scheme, is operating in Europe and its credits are called European Union Allowances (EUAs).
Airshares EU Carbon Allowances Fund is a commodity pool that invests in exchange-traded futures contracts for EUAs. Research firm PointCarbon recently estimated that trading in EUAs doubled in value in 2008 to $90 billion. EUAs represent approximately two-thirds of the world's carbon market. Several agencies verify carbon credits, but only EUAs are certified by a government body. Airshares only holds contracts based on those credits.
There is no mandatory cap-and-trade system in the United States but the Obama administration is expected to consider one, as well as another alternative- a carbon emissions tax. "Economists are now leaning toward a cap-and-trade model because we have seen there are real efficiencies in that," Feldman says. "A tax is somewhat arbitrary. You pick some percentage number based on the carbon that companies are putting into the air, and you don't know whether the tax will be effective or detrimental because if the economy gets stronger, those companies, such as utilities, pass it on to the consumer. Cap-and-trade systems are more efficient and cheaper."
Feldman adds he believes that "there is a real interest in reducing carbon emissions, not just by industry but by the citizenry." He thinks that people will want to own funds like ASO as commodities in their portfolios. Investors in such a fund could see the value of their shares increase when the price of carbon credits rise. As the cost of emissions control goes up, owning rights to emit carbon will go up, Feldman says, and eventually the price of the credits rises high enough so that it becomes cheaper to buy pollution control equipment than to buy the credits.
For individual investors who are ready to participate in this market, this ETF-like fund provides one of the few ways to do that.