Interviewing this company named ** global carbon group. Anyone familiar with this kind of trading, instruments to structure products and indeces used to hedge the fluctuation? your input will be greatly appreciated~~~
check out bloomberg magazine, the issue a few months back (nov/dec 07 i think?) which ran a main feature and extensive discussion on carbon trading.
bchadwick just said yesterday that he is familiar with it…
Carbon Trading in Europe is mostly done with futures, in part because it’s only important to have credits in December and January, when the inventories of emissions are done. So there isn’t a terribly active spot market. The primary market for Clean Development Mechanism credits is still developing. People don’t like to enter forward contracts for credits because oftentimes there is substantial delivery risk and not having credits because a counterparty failed to deliver exposes companies to both fines (which might be passed on to a counterparty through the legal system) and substantial headline risk (which is very sticky). In the US, there is a voluntary credits market, which is enforced by the fact that even if government isn’t mandating stuff, you can enter a contract to reduce emissions by a certain amount using an agreed-upon measurement methodology and the contract is still binding. These credits typically sell for 1/4-1/8 of the European credits, which are compliance driven. Funds with exposure to carbon-emitting industries often have carbon credits in their portfolios to hedge the risk of carbon prices eating into profits. The proper hedge ratio would probably have to be computed by regression or some method like that, but there’s not a lot of data. Carbon is nice because it’s highly uncorrelated to just about all markets except energy and maybe agriculture sectors. So it’s a good diversifier. However, lots of commodities have low correlation, and I haven’t checked how portfolios fare when they have other commodities in them other than carbon.
"Carbon is nice because it’s highly uncorrelated to just about all markets except energy " which makes up 85% of the world’s consumption of commodities so it would be really nice if it was instead “uncorrelated to just about all markets except pork bellies and orange juice” (two commodities in the “JDV Breakfast Index”).
bchad, I have been very impressed with your posts. Would you mind sharing with us what you do or how you became so knowledgable?
Joey, I was looking at correlations with equities sectors and FI, and not so much correlation with other commodities (only so much one can do at one time; other commodities are for future analysis). KJH, I used to be an academic, doing political economy of environment and development (i.e. sustainable development politics and economics) in emerging markets. Even earlier, I worked for an international development consulting firm that is well known in emerging markets, but not so well known in the US. I was a professor of International Affairs/Public Policy in a Master’s program at a pretty well known university in the US. I then decided that my specific research area was too niche for me to advance in my academic discipline at the level I wanted and started looking around for other industries where smarts are required and my global economics/politics knowledge and relatively good quant skills (though not quite up to the Ph.D. physics and math guys) would be useful. I came up with asset management, possibly with a focus on EM, possibly with a focus on quant. From there, I launched into CFA, decided that my environmental background would give me additional credibility in the emerging carbon trading arena, which has nice asset-management applications to it. These days I do a reasonable amount of private consulting to small boutiques, UN agencies interested in carbon stuff, and a few others. The consulting is mostly to pay the rent and build up a track record of activities that can substitute for the fact that I was never an analyst or associate at a BB investment bank or something like that, which is what most headhunters and HR types look for. What I’m finding is that it’s hard to make the case that I should be an analyst (too old/overqualified to be a junior analyst, not experienced enough to be a senior one). However, my consulting and teaching background seems to make me more attractive in strategist roles, and since I’ve sat in front of ministers and country presidents in the past, I’m am highly presentable, particularly to the HNW set. I also find I really like the teaching/explaining role, especially as products and economics get more intricate and complicated. So strategy is where I’m concentrating my efforts these days, though I still look for analyst roles that might get me to PM one day. I should say that I’ve learned a lot from CFA, a ton of external reading, and just talking with folks on this forum. Joey, numi, strikershank, drs, virginCFA, FIanalyst, and many many others all bring some really useful insights about different parts of the industry. And the deeper I go into this stuff, the more I love it. So this was the right choice for me, but, dang, it’s taking a long time to finish the transition, and it gets tough to explain to my family why I’m pushing forward when they say “just go back to teaching” (and there’s a whole other analysis on why that’s not a good place to be anymore). So that’s the schpeel about me, hope it didn’t come across as too self-serving.
thanks for the shout-out bchadwick…i’ve learned a lot from your posts too. wish you all the best with the transition, hopefully everything works out sooner rather than later
Best of luck. You sure have a fine understanding of financial matters.