Emission allowances: Difference between revisions

The [[Emission allowances|emissions allowance]] is a fascinating, transgressive product. It challenges the traditional boundaries in finance. It is neither [[debt]] nor [[equity]], and has none of the qualities of either: it confers no [[ownership]], there is no [[credit exposure]], and at least in some jurisdictions allowances cannot be [[pledge|pledged]] or held in [[trust]], so they acquire the [[credit exposure]] of whomever you find to hold them on your behalf. In some ways they behave rather like a [[cash]] instrument: they represent an abstract value whilst having no intrinsic worth, can only be held, not owned, but unlike cash they expire, and before expiry can be redeemed — not for money, but for the release from an obligation to pay money.

Emissions allowance trading schemes are a bit “[[King Cnut|Cnutish]]” in that they are a creature of unilateral government decree: the regulators declared that carbon polluters must submit these allowances, and so they did. In this way you can regard emissions trading as a form of pure, unadulterated regulatory derivative.