Spread Betting Carbon Emissions
There can be few people who have not heard about trading of carbon emissions. Some people even know how large their personal carbon footprint is, but this requires a certain amount of work. The idea of trading carbon emissions has been contentious in some quarters, and others said it would not work, but it seems to have worked out in practice.
The EU emissions trading system has been in operation for a few years, and is designed to combat climate change by reducing greenhouse gas emissions. It covers 30 countries and 11,000 power stations. The system is otherwise referred to as a “cap and trade” principle, which can be simply understood even though the operation is complex.
The “cap” refers to a limit on the amount of greenhouse gases that can be emitted by industrial plants and other installations. Companies receive allowances which reflect their industry requirements, allowing them to continue operation. Over time the level of the cap is reduced, which ostensibly requires lower emissions, or the company will be penalized.
The “trading” part of cap and trade comes into effect when companies do not homogenously reduce their emissions in line with requirements. If they reduce their emissions more than required, they can save those allowances for a future year or they can sell or trade them on the market. If they cannot or choose not to reduce emissions as required, then to avoid penalty they must trade or buy allowances from someone else who has an excess.
The result of this method of reducing emissions is that targets can be met in overall terms, but that companies will take the most cost-effective route, buying or selling emissions in the way that works out most financially advantageous to them.
As it becomes more difficult or costly to reduce carbon emissions over time, you can expect the equivalent cost to increase. Market forces will work to balance the cost of updating or modified equipment against the cost of simply buying extra allowances on the open market. When you are spread betting on carbon emissions, you are taking a view on how the price will change over time.
It is not clear how rapidly or consistently the cost of carbon allowances will increase. The easily found reductions in carbon emissions, the low hanging fruit, have already been taken, and it depends on every individual circumstance how much more difficult it will get to reduce emissions further. This is effectively what you are spread betting on.
If you want to spread bet on carbon emissions, then you should adopt the standard practice of examining the charts on different time frames, and possibly printing them out so that you can annotate them to find the support and resistance levels, and note trendlines. From this, you can start to put together a trading plan which you can test on the historic values to see if it gives you a consistent profit. Once you have defined your strategy, it is best to test it on a demo account for a week or two before going live and betting real money.
Spread Betting on Carbon Emissions
When you are spread betting on carbon emissions, you should keep a check on the status of the government intervention. From time to time, there will be auctions of surplus carbon credits, and you can expect that the market will move dramatically at these times. The safest advice is to stay out of any bets if an auction is imminent; or the gambling option is to take out a bet reflecting what you think the government will do – which is not a recommended practice, as you will be caught out sometimes.
The current futures based price for carbon emissions is 930.0 – 950.0, expiring at the end of the year. If your analysis suggests that the price of carbon emissions will go down in the short term, then you may want to place a sell bet on this, staking perhaps £5 per point. Your bet will go on at the lower selling price of 930.0.
Assuming you are correct, you may close your bet for a win if the price drops to 846.0 – 866.0. To work out how much you have gained, you simply have to figure out the point difference and multiply it by your stake. Your bet went on at 930.0, as mentioned above, and was closed at the buying price of 866.0. The difference between these is 64 points. You staked £5 per point, therefore you have made a total of £320.
If your spreadbet did not work out, and the price went up you would want to close your bet for a loss before it goes too far. Say it went up to 955.5 – 975.5 and you closed your trade. This time the number of points difference is 975.5 minus 930.0, or 45.5 points. That means you lost £227.50.
In spread betting terms, the spread of 20 points between the buying and selling prices is fairly large, and that contributed to the size of your loss. On your winning trade, the price as a whole moved 84 points giving you £320 profit, and on your losing trade the price as a whole moved 25.5 points, less than a third, which equated to a loss of £227.50, more than two thirds. The apparent difference is because of the spread that the dealer receives as his fee.
As a second example of spread trading on carbon emissions, assume you make a long bet at the price of 950.0 for £25 per point, and the price goes up to 1086.5 – 1106.5. This time you have made 1086.5 less 950.0 points on your bet, which is 136.5 points. You staked £25 per point, so your winnings total £3412.50.
Once again, you must consider that your bet may not win, and you must close it quickly to minimize your losses. Say the price went down to 921.0 – 941.0 and you closed your bet. The bet went on at 950.0, and closed at 921.0, a point difference of 29. With a stake of £25 per point, the bet cost you £725.
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