Institutional Investor's Alpha Magazine - April 2008 - (Page 78)

Carbon Trading neither are the companies in which he invests. Nor have those companies ﬁgured carbon into their proﬁt equations. Of course, carbon credits could well become a bigger part of corporate ﬁ nancial planning in the near future. Some U.S. banks, for instance, appear to be counting on a comprehensive U.S. energy policy that would include a cap-and-trade system as they bulk up their carbon trading desks and expand their Europe focus to include the emerging U.S. market. “We are going to have a carbon exchange economy globally for the next several decades,” asserts Kedin Kilgore, executive director of JPMorgan Chase & Co.’s Americas Environmental Markets. “It is extremely difﬁcult to imagine that the U.S. won’t be part of that.” Kilgore leads a team that is spearheading the bank’s carbon market development. Last year the team had three members; it now has 15. It focuses much of its attention on the European market but plans to set up a U.S. trading hub, though it has not said when. In March, JPMorgan announced it was buying ClimateCare, an Oxford, U.K.–based company that scouts worldwide for carbon reduction projects it can mine for carbon credits that are tradable to companies in other countries. In December, JPMorgan became one of the ﬁrst investors in a venture spearheaded by Nymex Holdings, parent of the New York Mercantile Exchange, to create the Green Exchange, which will compete with Sandor’s Chicago Climate Exchange. During its ﬁrst week of operation, the third week of March, the Nymex Green Exchange logged about 1,000 option trades and 280 futures contracts, all in the EU. The exchange offers a range of products focused on environmental futures, options and swaps, including carbon credits. Credit Suisse, Merrill Lynch & Co. and Morgan Stanley are among the biggest players to have signed on. Greenwich, Connecticut, hedge fund Tudor Investment Corp., which manages $16 billion in assets, has also joined. Nancy King, a managing director at Morgan Stanley and COO of its global gas and power group, is in charge of the ﬁrm’s emissions business and advises clients to begin considering carbon trading. “People should be aware that carbon most likely will be a factor not only in trading but in how companies will be evaluated,” King says. “And it will have to be managed as part of risk management, if, in fact, it is regulated.” As for the likelihood of the U.S.’s enacting a cap-andtrade system, King subscribes to the conventional wisdom that regulation is coming sooner rather than later. “I think the writing is on the wall,” she says. Previous efforts to establish such a system offer clues as to how it might play out. Europe’s basic framework actually was ﬁrst developed and put into use in limited fashion in the U.S., starting with a simple trading program for certain emissions. That program was launched by the Environmental Protection Agency in the 1970s. Cap-and-trade programs got a big boost in the 1990s, when efforts to combat acid rain focused on coal-burning power plants that emitted sulfur dioxide. Sulfur credits Photo by Saverio Truglia for Alpha Richard Sandor, CEO of the Chicago Climate Exchange, says carbon could become the most widely traded commodity in the world. large, multistrategy hedge funds are testing the waters. Citadel Group, the $12 billion Chicago-based hedge fund, declined to discuss its carbon trading strategy, but in a 2005 speech on risk and capital markets, Citadel founder Kenneth Grifﬁn pointed to emissions-credit trading as a well-made marriage of government regulation and market economics. A market-based system for trading emissions credits, Grifﬁn said, will produce both proﬁts and cleaner air. “Enlightened public policy like this does more than create efﬁcient markets; it creates a better world,” he said. In Europe a number of banks have emerged as carbon traders, but big hedge funds have been reluctant to discuss their emissions-trading strategies. Man Group, the $68 billion London-based hedge fund, has touted the opportunities in carbon trading for several years. One way hedge funds are investing is in companies that provide technology to reduce carbon emissions, like makers of solar panels or wind generators. Mark Cox, founder of New Energy Fund ($9 billion in assets under management) in New York, is among those who have been buying stakes in environmental technology. Cox recently invested in a Dutch solar cell company, ﬁguring the demand for solar power is greater in Europe at this time because of its advanced cap-and-trade system. (Companies that use solar cells can get carbon credits, which can rise in value, thereby making energy-saving technology more valuable.) But Cox isn’t trading carbon credit contracts yet, and 78 • INSTITUTIONAL INVESTOR’S ALPHA • APRIL 2008

Table of Contents Feed for the Digital Edition of Institutional Investor's Alpha Magazine - April 2008

Institutional Investor's Alpha Magazine - April 2008 Contents Letter from the Editor Longs & Shorts Pension Corner: Here to Eternity The Good Guys: Voice of Hope Cover Story: The Kings of Cash Where the Money Is Into the Light Interview: Proceeding with Caution Strategies: A Convenient Truth Alpha Bytes: Village Voice Unhedged: Commentary: No Time for Complacency

Institutional Investor's Alpha Magazine - April 2008

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