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February 09, 2009
First US-Traded Investment Product Seeks to Capitalize on Growing Carbon Trading Market
    by Robert Kropp

AirShares Fund aligns returns with European Union Allowances for carbon emissions, which account for the majority of the world's emissions trading.


An analysis by New Carbon Finance, a provider of research and analysis across the world's carbon markets for the purpose of better investment and trading decisions, found that four billion tons of carbon allowances changed hands in 2008, representing an increase of 42% over 2007 in the number of transactions.

Higher traded volumes and higher prices led to an increase of 84% in the market value of these transactions and totaled $118 billion in 2008. New Carbon Finance predicted that growth in the global carbon market will reach $150 billion in 2009.

The European Union Allowance (EUA) market accounted for 70% of the volume and 80% of the value of carbon emissions traded in 2008. An EUA represents the entitlement to emit a ton of carbon dioxide or an amount of any other greenhouse gas with an equivalent global warming potential during a specified period.

The allowances can be traded in a cap-and-trade system, in which companies needing to increase their emission allowances must buy credits from companies that pollute less.

In order to provide investors with exposure to the growing carbon market, XShares Advisors, an investment advisor, launched the AirShares EU Carbon Allowances Fund, the first US exchange-traded product seeking to align investment returns with the performance of EUA futures contracts that are eligible for trading under the European Union Emissions Trading Scheme (EU ETS).

This Fund is similar to a electronically traded fund in that it pools the assets of investors, in this case to use in futures and commodity option trading. A futures contract is an obligation to deliver a set quantity and quality of a commodity at a specific future date.

AirShares holds unleveraged long positions in a portfolio of European Climate Exchange Carbon Financial Instrument Futures Contracts (ECX CFI Futures Contracts), each of which provides for delivery of 1,000 EUAs on a specified date at a specified price.

The fund's portfolio consists of a basket of up to four listed EUA futures contracts which will expire in December of years 2009 through 2012. AirShares will not take delivery of EUA contracts, but will sell the expiring contracts and replace them with contracts of later expiration dates. The fund will be rebalanced annually.

 

 
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