Collateralised emissions obligations

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Myths and legends of the market

The JC’s guide to the foundational mythology of the markets.™

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Emissions Allowance.png

Emissions Allowance
Wanna stop frying the planet? Start here. Will it help? Who knows? The forward curve is in contango: who cares!

Docs Take your pick: IETA, ISDA or even EFET: none of them good. But at least you have flexibility in mediocrity 4
Amendability Nope. The EU can amend them, but you can’t. 0
Collateral They aren’t anyone’s obligations as such. In fact, they’re more like a sort of unofficial, made up, (hush) crypto. No credit risk! DNA
Transferability With an account at the Union Registry, sure! 7
Leverage Not unless you do a CEmO, and we just made that up. 0
Fright-o-meter Not directly scary as long as there is an EU with Greta Thundberg in it, but global warming is going to lead to Armageddon so, you know, indirectly. 5

Index: Click to expand:

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Collateralised emissions obligations, (also known as “CEmOs”) were an apocryphal structured product type consisting of a tranched, securitised, leveraged exposure to carbon credits[1] that did not in fact exist but, had it existed, surely would have precipitated a global financial crisis, as carbon traders, hopped-up on absurd amounts of synthetic alpha blew up not just the financial markets but the entire planetary ecosystem with their leveraged bets on the squirrely commitments of G20 nations to act on climate change.

“A five-times leveraged derivative of hot air!” traders would chortle, selling these things out to the most vulnerable and credulous people in society: minimum-wage hospitality workers, the elderly, the infirm, the illiterate and regional German landesbanks.

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References

  1. In the heady days of 2007 the JC even had this idea, ran down to the commodities trading floor to share what he thought was a tremendous joke with the structured products team. The lead structurer shook his head morosely and said, “Won’t work. We have tried and we can’t get the accounting treatment we need.”