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Carbon Credit Derivatives

Commodities / Climate Change May 05, 2012 - 02:03 PM GMT

By: Dr_Jeff_Lewis

Commodities Carbon credits are tradable permits or certificates that are typically related to the emission of one ton carbon dioxide into the atmosphere. Carbon dioxide is the primary greenhouse gas considered responsible for the controversial global warming process. 

Carbon credits can be earned by companies who engage in ecologically friendly practices that remove the amount of carbon dioxide emissions from the environment.  These credits can then be sold to other companies that continue to produce carbon emissions as a way to finance further reductions in carbon dioxide emissions.


Carbon credits were chosen by countries agreeing to the Kyoto Protocol as an alternative to a carbon tax.

Growing Interest in Carbon Credit Derivatives 

Carbon credit derivatives, such as futures and options contracts, are typically over the counter or exchange traded agreements that have their value set by the market price of an underlying asset, which in this case would be a carbon credit.

In order to hedge their exposure to price fluctuations in carbon credits, companies actively involved in using them have shown an interest in transacting carbon credit derivatives. They typically prefer to look at carbon credits as a tradable commodity, like silver or gold, and would like to manage their exposures in a similar way to how they currently hedge other commodity risks.

Financial institutions, such as J.P. Morgan Chase, have also expressed an interest in providing an over the counter market in carbon credit derivatives to their customers.

Carbon Credit Derivatives - Another Tail to Wag the Dog?

Nevertheless, critics of this currently developing carbon credit derivative market have shown concern over allowing the free market to develop yet another derivative or paper product.

They often worry that carbon credit derivatives could lead to manipulation of the fair value price of carbon credits by those with very deep pockets and a compelling interest in doing so, since the price of readily tradable derivatives often end up driving the price of the underlying asset, and not the other way around.

Lessons From the Manipulated Silver Derivatives Market

Is this negative perspective on carbon credit derivatives realistic?  Well, one only has to review the well-established history of silver market manipulation by large concerns covertly intervening in the silver futures derivative market to understand that such manipulation of derivatives markets can and very likely does happen.

These market manipulators and their agents are widely credited with keeping physical silver prices artificially low. They can do this by selling silver futures without having the ability or intention to actually deliver anything physical other than printable and intrinsically worthless paper currency.

By Dr. Jeff Lewis

    Dr. Jeffrey Lewis, in addition to running a busy medical practice, is the editor of Silver-Coin-Investor.com and Hard-Money-Newsletter-Review.com

    Copyright © 2012 Dr. Jeff Lewis- All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.


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