Are you an investor in the carbon market? Are you genuinely helping the planet or just a speculative opportunist?
Since 2021, UK retail investors have had the option to purchase exchange-traded funds (ETFs) that track the price of carbon in the EU’s emissions trading system. This system requires polluters to hold emissions allowances (EUAs) to emit carbon dioxide. The idea is that as the price of carbon rises, companies will be motivated to reduce emissions and invest in renewable energy. Companies with surplus permits can sell them on the open market.
There are two main ETFs available to UK retail investors: the WisdomTree Carbon ETC and the SparkChange Physical Carbon EUA ETC. The WisdomTree also launched a third ETF in April, which tracks the smaller carbon market in California.
The investment case for purchasing a fund linked to the price of carbon is that it is expected to increase. The EU plans to release fewer EUAs in the future, intending to raise the price to a level that influences capital expenditure decisions by power companies and other polluters. Additionally, the EU plans to expand the scheme to cover more sectors beyond power companies and energy-intensive industries.
After reaching €100 in February, which could significantly impact behavior, the price has now dropped to €95 after a sharp climb in the past two weeks. The performance of the exchange-traded commodities (ETCs) has been relatively muted in the past year, underperforming major stock markets.
Nevertheless, analysts predict that the price will rise significantly in the coming years. By 2030, the average forecast is €144, according to a poll by Carbon Pulse. However, they expect the price to reach €102 by 2025, which is not far from the level reached in February.
EUA prices are highly volatile, with a volatility rate of over 51% in 2020. This volatility is heavily influenced by fluctuations in gas prices and utility companies’ purchasing behavior. Such price fluctuations have made some wealth managers cautious about recommending these products to retail investors.
SparkChange argues that its physically-backed fund, which actually holds the EUA, has a greater environmental impact compared to futures-based products. Handelsbanken holds the SparkChange ETC in its sustainable portfolio based on these grounds. On the other hand, WisdomTree focuses on the potential returns linked to the increasing price of carbon and argues that introducing more liquidity into the market through its ETF can lead to better and more efficient prices.
While the current market for carbon investments may not be suitable for sustainability purists or risk-averse investors, it offers diversification benefits and the potential for long-term growth. As global regulatory support for decarbonization increases, the use case for these carbon-focused ETFs becomes stronger.
Investing in carbon markets may not align with the values of sustainability-minded investors who prefer to avoid oil and gas companies altogether. However, some investors view engagement in the carbon market as an opportunity to contribute to its expansion. Additionally, others see it as a strategic play in the energy transition. Nonetheless, given the market’s volatility and its close ties to regulatory decisions, retail investors should approach it cautiously.
Alice Ross is an FT contributor. Her book, “Investing to Save the Planet”, is published by Penguin Business. Follow her on Twitter.
Denial of responsibility! VigourTimes is an automatic aggregator of Global media. In each content, the hyperlink to the primary source is specified. All trademarks belong to their rightful owners, and all materials to their authors. For any complaint, please reach us at – [email protected]. We will take necessary action within 24 hours.
