Performance
Yield after fees (%)		2008		2007			2006						0
January		-8.63		1.09			-
February		0.03		0.69			-
March		0.43		0.09			-
April		-0.63		-0.24			-
May		-1.19		8.92			-0.43
June		-2.58		7.15			8.40
July		-3.87		14.70			5.07
August		1.44		0.47			3.90
September				-2.91			-6.04
October				1.27			0.27
November				-2.93			0.68
December				-0.55			2.33
		-14.4		29.7			14.4

* the historical rate of return up to and including October 2007 was obtained in the investment program ‘The Alfa CO2 portfolio’. The investment program operated with the same investment objectives and polices as ALFA CO2 Fund.

Trading strategies
As any fundamental market, the price of emissions allowances is determined by the supply and demand.  

The supply is capped by the allowances given to each pollutant but this cap is by no means the supply limit as emission reduction projects from CDM, Clean Development Mechanism, and JI, Joint Implementation, will increase the supply.

The demand is set by how much each pollutant will emit for each calendar period. Lower emissions production, through lower energy production, more environmentally efficient energy production and new technologies will decrease the demand while higher energy production and use of less environmentally efficient energy production units will increase the emissions output and the demand.

The price is also highly dependent on fuel prices and spreads between fuel prices. As price of power, gas and oil increases, the emissions prices will most probably increase while lower fuel prices will most probably decrease the emissions prices. However, this simplified relation might not always hold as the most important price factors for determining emissions prices are the spreads between fuel prices, mainly coal/power prices, coal/gas prices, coal/oil prices and gas/power prices.

If price of coal increases more in relation to other fuels, the coal plants will become less attractive for energy production and there will be fuel-switching towards gas and oil. As coal is the most pollutant energy production, the effect will be a reduction of emissions prices. By same way of reasoning, the emissions prices will increase when coal prices decrease more in relation to other fuel prices. If gas prices increases more in relation to power and coal prices the fuel-switching will be towards energy production with coal as main fuel and this in turn will increase the emissions prices while lower gas prices in relation to power and coal prices will increase the energy production by gas and result in a reduction in emissions prices.

ALFA CO2 FUND uses fundamental approach to determine if the market is long or short emissions allowances, both in the short and long run. Higher energy production than normal increase the emissions production and moves the market into a short position while lower energy production moves the market into long position. By applying fuel prices and fuel price spreads to the emissions prices, we determine if the market is fundamentally priced and where the market should move, but as the market is highly political and high level of uncertainty exists regarding regulatory development of the market we have set strict rules for our trading strategies with full range of stop-loss and take-profit levels. Finally, technical analysis is used to determine price levels or price ranges when we enter or exit positions and strategies.

THE EMISSIONS MARKET

The Kyoto protocol
The Kyoto Protocol, with objective to stabilise concentration of greenhouse gases, in the atmosphere at a level that would prevent dangerous interference with the climate system, was negotiated in December 1997 in Kyoto, Japan and came into force on February 16, 2005 following ratification by Russia on November 18, 2004.

Today, a total of 156 countries, representing over 61% of global emissions, have ratified the agreement. Notable exceptions are USA and Australia with about 25% of global emissions.

The Kyoto Protocol is a legally binding agreement under which industrialized countries will reduce their collective emissions of greenhouse gases by 5.2% compared to the year 1990. The goal is to lower overall emissions from six greenhouse gases - carbon dioxide, methane, nitrous oxide, sulphur hexafluoride, HFCs, and PFCs - calculated as an average over the five year period of 2008-12.  

National targets range from 8% reductions for the European Union and some others to 7% for the US, 6% for Japan, 0% for Russia, and permitted increases of 8% for Australia and 10% for Iceland.

Emissions trading
Emissions trading is an administrative approach used to reduce the cost of pollution control by providing economic incentives for achieving emissions reductions. In such a plan, a central authority sets limits or "caps" on each country and each pollutant. Countries or pollutants that intend to exceed their limits may buy emissions credits from entities that are able to stay below their designated limits. This transfer is referred to as a trade. 

By ratification of the Kyoto Protocol, each Annex I country (mainly developed countries) has agreed to limit emissions to the levels described in the protocol. Countries, that have lower emission production than their limit, may offer the extra amount to buyers who can purchase the emissions credits in order to meet their targets. This rewards countries that meet their targets, and provides financial incentives to others to do so as soon as possible.

EU Emissions Trading Scheme - EU ETS
 The EU Emission Trading Scheme (EU ETS) has been active since January 1 2005. This scheme is an implementation of the Kyoto Protocol three years prior to the period 2008-2012 for which the European Union will have to meet legally binding greenhouse gas emission reductions under Kyoto.  

Phase One – 2005-2007
Under the first Phase of the EU ETS, only emission of CO2 is capped and the number of sectors included is limited compared with Kyoto. The EU ETS will cover a total of 12,000 installations in the 25 member countries. The penalty for non compliance is set to 40 €/tonne.

Phase Two – Kyoto 2008-2012
In Phase two, the first commitment period under the Kyoto Protocol, the EU is faced with stricter emission obligations. Under the Kyoto Protocol, the emission of five more Greenhouse gases is capped in addition to CO2. These gases are Methane (CH4), Nitrous Oxide (N2O), hydro fluorocarbons (HFCs), per fluorocarbons (PFCs) and sulphur hexafluoride (SH6).The reduction obligations are related to the emission level in 1990. Phase two also include the chemicals, transport and aluminium sectors. The penalty for non compliance will be 100 €/tonne.

The Emissions market
The first CO2 trade took place late 2003 and since then the market volumes have increased substantially. Today, the market daily turnover is 3-5 million tons with daily market size of 100-150 million Euros. The common perception is for the market volumes to increase further 3-5 times in the coming year.

As we get closer towards the second phase, 2008-2012, where the market becomes global, the market participants and the market volumes will increase substantially and daily market turnover of billions of Euros will not be far fetched.

The market instruments include futures and forward contracts with expiry in March, June, September and December each year till 2012, spot market and spread futures and forward contracts. The options market is still very limited in size. The liquidity is mainly within the first two to three years.

There are several exchanges providing market place and clearing for the emissions contracts with The Intercontinental Exchange, The ICE, being the most active. There are also around 10 brokers providing brokering services for both OTC as well as cleared products.