Sat. Nov 27th, 2021


The launch last week of a carbon credit exchange traded fund was widely welcomed for its innovative approach, but some industry observers warn that if the concept proves to be too successful, there could be “unintended consequences”.

Unlike competing ETFs, which provide exposure to futures prices of carbon credits, the SparkChange Physical Carbon EUA ETC (CO2), launched on the London Stock Exchange on Thursday, is the first ETF to invest directly and exclusively in EU grants (or EUAs). , otherwise known as pollution permits.

The idea is that by buying the ETF, investors are withdrawing carbon allowances from the market and thus preventing polluters from using them, driving up the cost of the remaining EUAs and helping to prevent emissions from occurring in the first place.

EUAs have almost doubled in price since the beginning of the year, rising from around € 35 per tonne at the beginning of January to a high of almost € 65 at the end of September.

The launch day was a success. Assets under management rose from $ 1 million at the opening bell to more than $ 11 million at the close of trading, according to Hector McNeil, co-founder of HanETF, the white-label ETF provider that partnered with SparkChange to bring the ETF to market. to bring.

“Buying a physically-supported carbon allowance and effectively removing the pollutant permit from a polluter does exactly that – it forces pollutants to reduce emissions now,” says Jan Ahrens, head of research at SparkChange. He noted that EUAs, with their controlled supply, differ from unrestricted carbon deposits, although both have sometimes been referred to as carbon credits.

Kenneth Lamont, senior fund analyst for passive fund research at Morningstar Europe, said the concept of investing directly in EUAs via the ETF was an interesting development that offers clear advantages over futures-based carbon credit ETFs.

“By locating physical contracts, the new ETC neatly sidesteps the additional price noise created by tracking futures contracts,” Lamont said. “This is especially important when the futures market is struggling – [a phenomenon that] occurs when the price of carbon allowances is expected to rise. In this environment, investors can lose money even when the spot price of carbon credits rises. ”

US investors have access to four ETFs investing in carbon futures: the KraneShares Global Carbon ETF (KRBN); KraneShares California Carbon Allowance ETF (KCCA); KraneShares European Carbon Allowance ETF (KEUA); and iPathA Series B Carbon ETN (GRN).

WisdomTree has its futures-based Carbon ETF (CARBON) on the LSE in August this year.

However, some observers in the industry sounded cautious.

Patrick Wood Uribe, CEO of Util, a provider of sustainable investment data, said one-dimensional action could have “unintended consequences”.

“What happens if you do allow investors to limit the supply of grants?” he said.

Wood Uribe argued that one of the outcomes could be rising energy prices, which in turn could have negative social consequences if prices rise too fast. Pollutants can also simply decide it’s worth paying for the trade, he said.

Wood Uribe said he welcomed the idea of ​​trying to solve a non-financial problem in a financial way, but added: “It emphasizes how important it is to think holistically about these things.”

Lana Khabarova, founder of SustainFi, a sustainable and impact investing website, agreed that investors who really want to buy the ETF need to think about it carefully.

She said that although there was no intention to increase the number of EUAs in supply, Article 29a of the EU Emissions Trading Directive allowed authorities to increase the supply of allowances if there were significant and sustained price increases, which could affect the value of the ETF’s holdings.

Khabarova also said that EUAs have already been used by hedge funds to hedge their exposure to investments in oil and gas stocks, raising the prospect that this ETF could be used in the same way.

But despite possible problems, she said she welcomed the new fund. “I think it’s great that investors can invest in carbon credits, whether through futures or physical credits.”

She said that carbon prices were “too low to achieve the goals of the Paris Agreement” and that they should exceed $ 100 per ton.

Lamont agreed that the product’s positive properties could not be ignored. “This is a great example of an ETC / ETF providing access to markets that were once the institutional investor retention,” he said.

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