Everyone has heard the term “carbon emissions” but few know exactly what that entails. Put simply, anytime gas, oil, coal, or other fossil fuel is burned, carbon dioxide is released, or emitted, into the air. Plants and trees naturally absorb this carbon dioxide, but our emissions have been at such great levels that they cannot possibly re-absorb it all. This means that the carbon dioxide stays in the atmosphere and increases the planet’s temperature, making the climate more unpredictable and the weather more unstable. Investing in carbon emissions is essentially taking advantage of the attempt to control those emissions by the government that sets limits on them. Certain companies and businesses may be given a set limit of carbon credits which can be traded freely. Large corporations that need more leeway to emit more carbon can purchase additional credits on the carbon trading market. The theory is that the emissions allowed in any given year will be reduced slightly over a certain number of years until they are decreased to a safe level for the environment.
AIG (American International Group) is one major insurance company that explored carbon trading and currently provides valuable carbon trading insurance products to investors and companies. Climate Exchange PLC is the biggest carbon trading entity in the entire world while the privately held APX Inc. gives real-time information to banks and utility companies that need to stay in the know on energy trading.
Anyone with investments in companies like American Electric Power Company may stand to lose from carbon trading because AEP produces the most CO2 than any other US company. It’s unlikely that the carbon cap will be met to the regulators’ standards, and the company will need to buy carbon credits on the market.
Some companies, like the Global Climate CTA Fund, provide greenhouse gas and CO2 emissions hedging and trading with partners like Eurex. These entities work with European emission allowances, certified emission reduction credits, voluntary emissions, carbon financial instruments, sulphur emissions, and nitrogen emissions. In the United States, the Chicago Climate Exchange (CCX) is the nation’s only cap-and-trade system. With only one exchange in the entire country, it’s obvious how new this industry group is and how foreign the concept of trading energy products may be to most individuals. Even so, there has been an increase in demand for liquidity and transparency for carbon emissions in the investment world, which will prove fruitful for major investors.