Carbon Cap Trading Gains Popularity
Carbon cap trading, also known as emissions trading, has been gaining popularity with investors during recent quarters. Carbon cap trading has emerged in the marketplace as a flexible mechanism of the Kyoto Protocol. The protocol is a 1997 international treaty that caps the emissions of six major greenhouse gases among the most developed nations.
Institutional investors have two main reasons for wanting exposure to the carbon markets. One is to effectively hedge an environmentally damaging portion of their portfolios. Environmentally damaging sectors include industries such as oil and coal. Another reason is because the growth of the carbon markets has been eye-catching. According to World Bank estimates, the size of the carbon markets have increased five fold since 2005. In dollars, the carbon markets stand at more than $60 billion as of 2007.
These figures are compelling to institutional investors, and the demand for carbon-related funds has accelerated.
In a recent conversation with a BHA analyst, the principal of a New York-based fund of hedge funds expressed interest in researching funds that have experience navigating the natural resources and clean technology sectors. Carbon traders in particular were of interest to this investor. He believes that the $500 billion of the $2.7 trillion global stimulus package, that has been ear-marked for clean conscious energy will create immense opportunities for these types of funds. He indicated a preference for funds that trade with low-to-moderate volatility and have returns in the low teens.