Kyoto's structural arbitrage play

Fri Dec 1, 2006



Carbon trading takes off, and big names join the action

With the world heating up amid dire predictions about the future survival of planet Earth, governments and industrial polluters are increasingly turning to market solutions. Following the 2005 ratification of the Kyoto Protocol, a United Nations initiative designed to curb carbon dioxide (CO2) and other greenhouse gas emissions in the industrialized world, a nascent market in trading carbon emission rights is quickly taking shape. The so-called global carbon market has the potential to become the largest commodity market in the world, according to many economists, and a handful of hedge funds are getting in on the ground floor.

In the first half of 2006, $15 billion worth of CO2 emission credits were traded, five times greater than during the same period in 2005. According to the research firm Point Carbon, carbon funds specifically investing and trading in these credits are...

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