Carbon price boom attracts investors to emissions trading market

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Investors have crammed into new carbon credit trading funds, helping to make the emerging market one of the best performing commodity-related investments of the past year.

The price of carbon credits traded in Europe has jumped 135% in the past 12 months and recently hit a series of records as economic activity rebounded from pandemic lockdowns. Only lumber, pushed up by the real estate boom, proved to be a better investment in raw materials.

Stricter government controls, a harsh European winter and low stocks of liquefied natural gas, which necessitated the need to burn more carbon-intensive coal, also played a role.

The booming market has drawn investor money from a collection of nascent, carbon-only investment funds looking to cash in on the transition of economies to fossil fuels. KraneShares Global Carbon ETF, launched in July 2020, quickly attracted nearly $ 400 million in investor money, most of those entries this year. It trades under the stock symbol KRBN.

Jonathan Shelon, COO at KraneShares, says demand has grown steadily from retail investors and professionals who see investing as a way to take advantage of tighter regulation and pressure investors on companies to reduce carbon emissions.

Other funds intended for institutional investors also target carbon.

Mark Carhart, the former head of a hedge fund at Goldman Sachs, has started a carbon transition fund with Kepos Capital that includes emission allowances, futures, derivatives and stocks. The fund manages hundreds of millions of dollars in assets, according to the fund’s investors.

New York-based Aetos Capital is halfway to its goal of raising around $ 200 million for a carbon fund it launched last year.

In April, Northlander Commodity Advisors LLP, a London-based hedge fund manager, launched a carbon-only fund that aims to raise $ 100 million. Carbon Cap Management manages a $ 54 million Global Carbon Fund that monitors the European and US carbon markets.

Most of these funds are marketed as part of carbon trading programs put in place by governments to reduce greenhouse gas emissions.

In an interview with the WSJ’s Timothy Puko, US Climate Change Envoy John Kerry explains the roles he would like to see the private sector and countries play in tackling climate change. Photo: Rob Alcaraz / The Wall Street Journal

The European Union’s carbon trading program – the world’s largest and most traded carbon market – was launched in 2005 as part of its Kyoto Protocol commitments and is one of the key tools of the bloc to reduce emissions. The European Commission, the EU’s executive body, grants credits to countries, which then auction them off to factories, power plants and other polluters who are required to buy credits for the carbon they emit.

Intercontinental Exchange, which hosts European and American emissions trading, says the number of participants trading in both European and North American carbon markets increased by 85% between 2017 and 2020.

Open interest – or open contracts – on European emission credits reached a record $ 105 billion on May 25, the ICE said.

European Intercontinental Exchange carbon futures – Europe’s main carbon asset – closed Thursday at € 50.29 per metric tonne, the equivalent of $ 60.99, as prices slipped from recent highs of 56 , 65 €. Despite this, traders are betting carbon prices will rise to as much as € 100 per metric tonne, said Trevor Sikorski, head of energy transition research at consultancy firm Energy Aspects.

The other main venue for carbon emissions trading is the cap-and-trade system that California shares with Quebec, known as the Western Climate Initiative. It is a tenth the size of the European market, but it is increasingly attractive to traders as it tends to be less volatile.

The WCI structure incorporates a minimum carbon price that increases each year by 5% plus inflation, which means that prices are legislated to increase each year.

Carbon trading started over a decade ago and initially failed to gain momentum as demand for emission allowances failed to keep up with supply. For years, carbon prices have experienced roller coaster volatility as trading volumes languished at low levels.

European regulators changed the way the market works a few years ago, which has rekindled investor interest.

The prices of carbon credits rise when end users, such as power plants and aluminum smelters, need them to increase production. But investors also play a role, increasing lending and making it more expensive for carbon-intensive businesses to operate.

This can help reduce pollution, says Ulf Ek, director of investments at Northlander.

He says investors in his fund “want a good return but also want to do something good with their investment.”

The EU and the US have set ambitious targets for reducing carbon emissions. Brussels is aiming for carbon neutrality by 2050, while the Biden administration proposes to halve American emissions by the end of the decade.

“More and more investors are doing the math and realizing that the cost of halving emissions is significantly higher than the market,” said Ariel Perez, head of environmental products at commodity trading firm Hartree. Partners, which invests directly in loans.

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Write to David Hodari at David.Hodari@dowjones.com

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