Carbon credit traders turn to option contracts

Carbon credit traders turn to option contracts
By Morten Andersen 02/07/2009 10:15
Ref: http://en.cop15.dk/news/view+news?newsid=1648

Uncertain of the outcome of December’s UN climate change conference, investors are getting nervous over their carbon credit portfolios.

A new trend in carbon credit trading has emerged, financial news agency Bloomberg reports: Instead of buying additional carbon credits (or Certified Emission Reductions, CER), investors turn to option contracts.
The contracts – also named “put options” – give investors the right to sell credits at fixed prices.
This strategy will limit the losses, should the parties to the UN Framework Convention on Climate Change agree to scale down or abandon the so-called Clean Development Mechanism (CDM) at December’s conference in Copenhagen.
“Some people are nervous about their portfolios and are seeking insurance to cover their exposure,” Ken Schneider, an options trader at New York-based environmental hedge fund RNK, tells Bloomberg, while stressing that he personally doesn’t believe in the strategy:
“Spending a couple of million euros to protect tens of millions is a no brainer, in my mind.”
The number of credits created under the UN program fell 30 percent last year, and the total amount financed under it dropped 12 percent to 6.5 billion USD, according to the World Bank. The UN credit benchmark has dropped 44 percent from a year ago, down to about 12 euros per ton. The fall in prices can mainly be attributed to global economic recession.