Cleaning Up With Carbon Credits (And How To Trade That)

 | Nov 23, 2021 12:32AM ET

This article was originally published at TopDown Charts

  • The price of EU carbon credits hit a fresh record high last week following COP26.

  • Global carbon prices are up 4x off the March 2020 low and 9x above the 2017 nadir.

  • Retail traders and advisors can access the space through a growing ETF

  • While appearing a bit faddish and overheated, the bull market in carbon could still be in the early phases

Winter is coming. Households in China, Europe, and the States will be faced with higher than average heating bills due to this year’s spike in commodity prices—namely in natural gas and coal. In a similar vein, credits of carbon offsets have also surged.

Carbon: The New Asset Class?/h2

Carbon as an asset class has grown in popularity. Trading (and holding) carbon credits is a market born out of regulation. Investors might be familiar with the “cap and trade” concept. The idea is that regulators cap the amount of carbon emissions and then allow emitters to trade the credits.

A cleaner environment is the goal while allowing the market to discover a fair price.

Scarcity Meets AUM/h2

High government regulation and surging fund flows culminated in an interesting and volatile situation this year. Carbon credits are scarce, but investor allocations continue to pour in.

The buyers of these credits are, of course, energy and utility firms, but demand grows from other corporate entities looking to put their green foot forward. Even golfer Rory McIlroy is paying up to reduce his carbon footprint.

Retail investors have interest, too. Naturally, as prices rally and volatility increases, speculative traders enter the scene.

Prices Rally Following Regulation Talks/h2

Last week, the European Union Emissions Trading System (ETS) Carbon Price notched a new record high above €66 following the COP26 conference which happened to coincide with a cold snap in the region. Carbon credits often become more valuable during a summer heatwave or winter cold blast due to higher power burns and electricity generation to meet demand.

Getting In on the Game/h2

Retail investors and advisors don’t need a futures trading seat or a source of institutional credit to get in on the carbon trading action. The KraneShares Global Carbon ETF (NYSE:KRBN) tracks the EU ETC carbon price fairly well.

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KRBN traded with very low volume up until energy commodity prices began to surge in 2Q21.

Our Weekly Macro Themes report details the growing interest in this unique asset. This week’s featured chart illustrates how much money is pouring into the carbon credit space.

We aggregated all the carbon credit ETFs that trade globally. AUM in these exchange-traded products was just a trace a year ago ($35 million) but now approaches $2.5 billion.