June 29 (Bloomberg) -- Carbon traders will buy more option contracts this year as a hedge against new climate laws and devaluation of credits for richer nations that help cut greenhouse gas in the developing world, RNK Capital LLC said.

Ken Schneider, an options trader at New York-based environmental hedge fund RNK, said investors are buying put options on speculation there will be new restrictions on United Nations’ Certified Emission Reduction credits. Polluters can now use the UN’s so-called offset credits from projects in less- developed nations to meet European Union requirements to reduce carbon dioxide emissions. Restrictions on their use may slash their value.

“The Certified Emission Reductions are a keg of dynamite in a matchstick factory,” Schneider, 43, said in an interview. “The rhetoric coming from the United Nations and the European Commission has talked of strong reform coming to the Clean Development Mechanism and even of its abolition.”

He didn’t say if RNK, a five-year-old firm that manages more than $750 million of environmental and emissions assets, is buying or selling puts. Investors represented by the International Emissions Trading Association are fighting proposals to limit or kill the UN’s offset program, known as the Clean Development Mechanism. The system creates credits that the World Bank says accounted for 26 percent of the $126 billion of permits traded in the global carbon market in 2008.

Climate Talks

About 190 nations are in talks ahead of the December summit in Copenhagen to set new international climate- protection laws starting in 2013. The talks are being run by the UN Framework Convention on Climate Change to extend the 1997 Kyoto Protocol. Chinese negotiators said last month that developed nations’ spending on CO2 projects in emerging markets should “not be used to offset” their own cuts.

If negotiators decide to scale back or eliminate the UN’s Clean Development Mechanism, demand for its Certified Emission Reduction credits could dry up, Schneider said. That’s created a market for put options giving investors the right to sell credits at fixed prices. A buyer of a put option profits when prices fall below an agreed strike price.

For instance, buyers paid about 3.25 euros ($4.57) a ton last week for 5 million tons of 2012 Certified Emission Reduction puts with a strike price of 10 euros a ton, according to data from the European Climate Exchange in London. Today’s closing price for 2012 CERs was 12.43 euros a ton, up 2.1 percent compared with June 26.

‘No Brainer’

More owners of credits may buy put options this year because of this uncertainty, Schneider said. Spending a couple of million euros to protect tens of millions is “a no brainer, in my mind,” he said. “Some people are nervous about their portfolios and are seeking insurance to cover their exposure.”

The number of credits created through projects in the UN program fell 30 percent last year, and the total amount financed under it dropped 12 percent to $6.5 billion, the World Bank said last month.

CER credits are traded in the world’s second-biggest greenhouse gas market. CERs can be used for compliance in the European Union’s carbon dioxide program, the world’s biggest.

The UN credit benchmark has dropped 44 percent from a year ago as the recession erodes industrial output and the need for factories and utilities to buy credits. They rose 2.3 percent today in London to 12 euros. EU carbon allowances for December rose 1.2 percent to close at 13.56 euros a metric ton on ECX after earlier falling as much as 1.9 percent.

More Uncertainty

Compounding uncertainty for the UN’s offset program is the willingness of some nations to buy Assigned Amount Units for compliance instead of CERs, Schneider said. So-called AAUs are given to nations with targets under the 1997 Kyoto Protocol. Nations with spare AAUs can sell to nations that overshoot their targets. Countries can also buy CERs to meet their targets.

If some countries favor AAUs, demand for CERs would drop. Four AAU deals have been completed so far this year for 75 million tons, Emmanuel Fages, a Paris-based analyst at Orbeo, said today in an e-mailed research note. There were three transactions for 24 million tons last year.

Fages estimates an additional 519 million tons of AAU deals, with 460 million tons of those coming from Ukraine. The high price of CERs a year ago helped make AAUs a “more attractive compliance instrument in recent months,” he said.

To contact the reporter on this story: Mathew Carr in London at m.carr@bloomberg.net

Last Updated: June 29, 2009 13:16 EDT