INVESTORS EMISSIONS INDEXES

Despite tough times for Exchange Traded Funds (ETFs) in the stock market, investments market giant Merrill Lynch is preparing vehicles for coming national emissions trading.

At the same time, British company EcoSecurities’ stock value is plummeting because it is unable to meet obligations to provide projects to companies seeking to offset emissions. Why? Because projects acceptable to the United Nations Clean Development Mechanism (UN CDM) are getting hard to find.

It is no small matter. EcoSecurities principals Marc Stuart and Pedro Moura Costa have lost paper value of $147 million this year.

The good news? This is all just part of a shaking out process for emissions trading. Early in the development of CDM, regulations on allowable projects was too loose. Standards are being tightened up. EcoSecurities’ growth was phenomenal. Natural processes are reining it in.

Paul Ezekiel, boardmember, EcoSecurities: "We don't believe the market is valuing the stock fairly…Given the lack of clarity in the U.N.'s rules, it's not fair to fault EcoSecurities for trying to maximize the number of credits it produces…It's like saying the speed limit's going to be between 50 and 90. So do you drive 55 or do you drive 85?"

A report on Merrill Lynch’s new emissions trading ETF vehicle contains information that seems to compare it to PowerShares’ Clean Energy index. It is a common mistake to consider emissions trading and energy investments together. (They both seem vaguely “green.”) In this case, both ARE exchange traded funds. But investing in energy is completely different than investing in emissions markets. Hopefully the folks at Investors Business Daily are clear about that.

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Merrill Thinks Green, Invents Carbon Indexes
Jesse Emspak, March 31, 2008 (Investor’s Business Daily)
and
Are ETFs Victims of Their Own Success?
Shefali Anand, April 12, 2008 (Wall Street Journal)
and
Two Carbon-Market Millionaires Take a Hit as U.N. Clamps Down
Jeffrey Ball, April 14, 2008 (Wall Street Journal)

WHO
Merrill Lynch (Francisco Blanch, head of global commodities research); XShares Advisors; EcoSecurities (Marc Stuart and Pedro Moura Costa); United Nations Clean Development Mechanism (UN CDM)

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WHAT
Anticipating the growth of emissions trading markets, investments giant Merrill Lynch has developed a set of indexes, investment vehicles that the company expects to evolve into Exchange Traded Funds (ETFs), even as ETFs in general are falling off with the stock market. Emissions trading star EcoSecurities is losing market share as the U.N. CDM tightens its control on credit allowances.

WHEN
- The U.N. CDM grew out of the 1997 Kyoto Protocols.
- PowerShares WilderHill Clean Energy (AMEX:PBW) is one of the oldest green ETFs.
- Claymore S&P Global Water Index ETF (AMEX:CGW) launched in May 2007.
- Most of the green ETFs performed strongly in 2007 but have struggled like other funds in the 2008 down market.
- New ETFs, 1st Q 2007: 94
- New ETFs, 1st Q 2008: 27

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WHERE
No central exchange exists for emissions. Credits are traded on the EU ETS, at a Kyoto protocol price (CDM) and on several voluntary markets such as the CCX and NYMEX.

WHY
- One credit in the CDM offsets one tonne of greenhouse gas emissions.
- EcoSecurities, with 300 employees in 30 offices around the world, reported a E45 million loss on revenues of E7.2 million due to its failure to provide the emissions trading credits it was obligated for.
- Merrill Lynch base index: MLCX Global CO2 Emissions Index (MLCXCO2E). Tracks emissions prices in the EU ETS and UN CDM, weighing each according to relevance in global markets. Merrill follows two other indexes: MLCXEUAE, in the European Union Allowance (EUA) market and MLCXCERE in the Certified Emissions Reduction (CER) market.
- XShares Advisors ETF: AirShares. Tracks credits traded in Europe.
- The new Merrill Lynch and XShares ETFs have not yet come to markets.
- Among other green ETFs: (1) PowerShares’ PowerShares WilderHill Clean Energy (AMEX:PBW). One of the largest at market value $1.4 billion. (2) Claymore ETF: Claymore S&P Global Water Index ETF (AMEX:CGW). Tracks companies that make water treatment chemicals, pumps, motors, plumbing equipment and meters. $340 million in assets. (3) Van Eck ETFs: Market Vectors Global Alternative Energy ETF (NYSEArca:GEX) and Market Vectors Environmental Services (AMEX:EVX).

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QUOTES
- From the article: “Francisco Blanch, Merrill's head of global commodities research, says the indexes track the value of carbon emissions credits…designed as investment vehicles…in an ETF or exchange traded note.”
- Dan Dolan, product manager, Select Sector SPDR ETFs: "The appetite for new products isn't what it used to be…"