The carbon market comes of age
Prices have risen by 70% this year in response to the aggressive goals set by the EU, which is targeting a 55% reduction in greenhouse gases by 2030 and net-zero by 2050. The hope is that, as the price of carbon credits continue to rise, polluting companies will at some point decide to invest in reducing emissions rather than purchasing increasingly expensive credits.
The re-opening of the world’s economies is also a bullish development for carbon pricing as industrial companies and utilities increase output and carbon emissions, which is sparking even more demand for carbon credits. And adding to that trend, new carbon markets seem to be popping up every month. Cap-and-trade carbon pricing exists in 24 national and sub-national markets currently. Another 19 more markets are in the development or consolidation phase.
Some American institutional investors and pension funds are gaining access to this market either directly, or through Exchange Traded Funds (ETF). The retail crowd is still relatively absent from this asset class.
In addition, as far as I can tell, the carbon market is uncorrelated with other risk assets. The underlying asset, the EU ETS, is a liquid instrument with a well-understood prospective risk premium. Its risk-adjusted returns have outperformed traditional asset classes such as equities, bonds, and other commodities. In my opinion, it appears to be a case of making some real money over the long-term, and, at the same time, contributing to the greater good by helping to address climate change and a much-improved global environment.
Any mention of specific securities or investments is for illustrative purposes only. Adviser’s clients may or may not hold the securities discussed in their portfolios. Adviser makes no representations that any of the securities discussed have been or will be profitable.