Dow Jones Indexes expands into carbon

Index provider Dow Jones Indexes, in partnership with the Chicago Climate Exchange (CCX), has launched two carbon indexes, with a view to further expanding into other gases and regions.

The new indexes are the Dow Jones/CCX European Carbon Index and Dow Jones/CCX Certified Emissions Reductions (CER) Index. These are designed to serve as benchmarks for market participants seeking exposure to carbon credits associated with the European Union Emissions Trading Scheme (EU ETS) and the Kyoto Protocol Clean Development Mechanism (CDM), respectively.

"These indexes provide market participants with price gauges to assess their exposure to this growing asset class. We hope to expand our offerings for emissions-themed benchmarks in the future,” said Michael Petronella, the president of Dow Jones Indexes in New York.

The EU ETS, with its European Union Allowances (EUA) credits, is the largest emissions-trading scheme in the world, created to reduce pollution released into the air throughout Europe. The CDM is a system whereby developed nations committed to reducing greenhouse gas emissions can invest in projects that reduce emissions in developing nations, allowing them to generate CER credits to offset the costs of lowering emissions in their own countries.

The Dow Jones/CCX European Carbon Index is composed of actively traded EUA futures contracts on the London-based European Climate Exchange. It measures the present discounted value of EUAs across different maturities. The Dow Jones/CCX CER Index measures the present discounted value of CERs across different maturities. The Euro Interbank Offered Rate interest rates are used to discount maturities of the nearby contract, while euro interest swap rates are used to discount the December-expiry contracts for the two subsequent years.

The indexes are weighted by the percentage of open interest that each contract has among the three included contracts on the last trading day of the previous quarter. The weightings of the underlying contracts for both indexes are rebalanced quarterly in April, July, October and January. The indexes are published in euros and roll once a year in December over a four-day period.

Dow Jones Indexes operates one of the most established commodity indexes, the Dow Jones AIG Commodity Index, and it is now producing products for carbon because it sees emissions as a rapidly developing asset class.

“We see emissions as a growing asset class and we aim to produce more indexes as more market-places become more established for different emissions-trading schemes,” said Jamie Farmer, senior director of global index operations and exchange relationships at Dow Jones in Princeton, New Jersey.

These are only the first two indexes in Dow Jones Indexes’ emissions index suite and the company has plans to expand this range to cover other types of gases and regions. The firm is still evaluating methodologies for these and expects to see its next products launched within the next six months.

See also: Index invasion
Indexes emerge