WITH A WHOPPING 100 shares traded its first day, the iPath Global Carbon ETN got off to a quiet but historic start on Wednesday. The exchange-traded note tracks the Barclays Capital Global Carbon Index, one benchmark of the quickly growing carbon credit market. With exchange-traded notes and funds on everything from platinum to pork bellies launched in recent months, this unequivocally takes the prize as the most obscure.

Carbon credits are the currency traded in the increasingly popular "cap-and-trade" system of controlling industrial emissions. Essentially, a government sets a limit on the level of emissions permitted by entities like factories and power stations. It passes out "credits" to those entities forced to comply by the rules. Those entities that need not use all their carbon credits (read: emit that level of carbon) can sell the leftovers on the open market. Those that wish to emit more carbon must buy credits from others. The idea is to offer an economic incentive to reduce greenhouse emissions. Presidential candidates John McCain and Barack Obama support cap-and-trade among their environmental policies.

Carbon's Bull Run

Recent Carbon Credit Prices Source: Carbonpositive.net

The vast majority of carbon trading occurs in Europe, and the ETN's index is largely based on the value of those credits. The cost to own the note is 0.75% a year, and it shows a slight correlation to world stocks and a modest negative correlation to bonds. The index is up 17% over the past year, despite volatility that would make financial stocks look tame. According to information provided by Barclays, the index on which the notes are based has often lost or gained 15% in one month's time.

What's worrisome about the notes, and "carbon finance" in general, is that the cap on carbon emissions is totally manmade and, unlike an investment in a bond or stock, serves no economic purpose whatsoever. The value of these worthless slips of paper is only what governments, spurred on by what I consider environmental heretics, dictate they are.

Even iPath's promotional material admits it, stating clearly on page 7 that "the regulatory environment is the main driver of both supply and demand. If regulations change, increasing (or decreasing) supply, it will subsequently affect the market price of carbon credits."

What Goes With Green?
Barclays Capital Global Carbon Index Total Return	1.00
Dow Jones-AIG Commodity Index Total Return	0.25
S&P 500 Index	0.59
Lehman U.S. Aggregate Bond Index	-0.66
MSCI EAFE Index	0.73
MSCI ACWI	0.68
MSCI Emerging Markets Index	0.56
Russell 2000 Index	0.50

Positive/negative correlations of carbon index to other indexes. Source: iPathetn.com

If you think the market for crude oil is manipulated by powerful interests, then consider carbon finance to be the ultimate rigged game. Carbon credits trade, by definition, on the whim of a regulator. In reality, there is no limit to carbon-based economic activity and no economic purposes served by passing out worthless credits. "Cap-and-trade" is simply a tax dressed up to appear like a free-market solution. But with the government behind the scenes pulling the strings for both supply and demand, there's nothing free market about it. Tree-hugging politicians, egged on by the environmental lobby, will make up the rules as they go along.

To that end, the price of the security and carbon credits in general will likely reflect the growth (or decline) of the global environmental movement. The stronger the greens get, the higher these inherently worthless credits will soar, and the more expensive it will become for companies to produce the goods and services that improve the human condition on earth.

Still, you've got to hand it to the folks at iPath for bringing this to market. In the past, I've written about other new securities such as fixed-income ETFs and volatility derivatives. From an investor's perspective, I'm always grateful for the ability to easily access new markets, if only to sell them short. When it comes to carbon credits, that's undoubtedly the best long-term position to take.

He Said It

"Why would an elected politician have a better idea of what the price is that the summation of the entire world's oil industry trading across an open exchange? For a government to try and determine a 'good' price for something is nonsense."

London Metal Exchange CEO Martin Abbott, as told to Bloomberg News.

Jonathan Hoenig is managing member at Capitalistpig Hedge Fund LLC.