Carbon trading is growing rapidly, presenting investors with an opportunity to diversify their portfolios and positively impact climate change, according to Mike Azlen, CEO of Carbon Cap Management, based in London. In 2018, carbon traded at about half a billion dollars daily in different markets worldwide, demonstrating its liquidity and potential as an investment asset. This liquidity has since increased significantly, with carbon now trading at $4 billion dollars per day, according to Azlen.
Azlen recently spoke with Adept Economics Director Gene Tunny on Gene’s Economics Explored podcast about carbon trading, and their conversation has been published as episode 212 of the show. A clip from the video recording of the interview is available on YouTube above, and you can listen to the full audio episode via the embedded player below.
Currently, there are multiple markets that investors can participate in, including the European Emissions Trading System (EU ETS), the UK ETS, the California Cap-and-Trade program, the Regional Greenhouse Gas Initiative (RGGI) cap-and-trade market on the East Coast of the United States, and the New Zealand ETS (Table 1).
The European market is the most liquid, trading approximately 2 billion metric tons of carbon daily. Since its launch in 2005, emissions in Europe have dropped by 1 billion metric tons per year, showcasing the market’s success in reducing carbon emissions, according to Azlen. This success has led to other countries taking note and announcing their plans to launch their carbon markets. Brazil, India, Japan, China, South Korea, and Mexico are among the countries mentioned in the podcast that have either launched or are in the process of launching carbon markets.
While many countries are making progress in establishing carbon markets, the United States does not have a federal cap and trade scheme. However, states such as California and those on the East Coast have implemented carbon markets. Washington recently launched its carbon market, and New York state has announced plans to launch a cap and trade carbon market soon. Despite the lack of a federal scheme, progress is being made at the state level.
Conversely, Australia has a hybrid carbon market for Australian Carbon Credit Units ( ACCUs). The ACCU market combines elements of both regulated and voluntary markets. While Australia is a Western democracy with no issues regarding transparency or country risk, the ACCU market does not meet the stringent criteria set by Carbon Cap’s World Carbon Fund mentioned in the podcast. The market allows for the generation of credits with questionable calculation methodologies, and there are concerns about the durability and risk of reversal of carbon storage (e.g. forests capturing carbon could be cleared and burned down in the future).
However, despite the growing interest in carbon trading, there is a lack of research on the statistical properties of this asset class. Recognising this gap, CarbonCap’s founder hired a PhD student from the London School of Economics to collect and analyse data on carbon trading. After three years in the peer review process, their research paper was published in the Journal of Alternative Investments, shedding light on the correlation, return, and volatility of carbon as an investment.
One of the key findings from the research is that carbon exhibits effectively no correlation to equities, bonds, real estate, or other commodities. Hence, investing in carbon can provide diversification benefits to a portfolio, reducing overall volatility and risk. Furthermore, carbon markets have varying levels of volatility across different markets. This allows investors to choose the level of risk that aligns with their investment objectives.
The podcast also highlights the types of investors involved in carbon trading. Institutional investors, such as pension funds and professional investment management organisations, are increasingly interested in carbon markets. These investors are attracted not only by the potential returns and low correlation but also by the climate impact and the potential for carbon exposure to act as a hedge against the impacts of climate change on equity and bond portfolios.
In Europe, Article 9 in the EU Taxonomy for Sustainable Activities has further promoted transparency and impact reporting for funds. This taxonomy sets minimum standards for reporting and ranks funds based on their level of impact. To achieve Article 9, funds must demonstrate meaningful impact and report their activities in detail. CarbonCap’s World Carbon Fund has achieved Article 9 status by providing a three-year audit trail of purchasing and cancelling carbon permits, ensuring transparency and legitimacy in their carbon-offsetting efforts.
In summary, carbon markets are becoming more important globally. Mike Azlen from Carbon Cap has made a good case for why investors should pay close attention to them.
Disclaimer: This is for general information only and does not constitute financial or investment advice. Published on 15 November 2023. Adept Economics Director Gene Tunny prepared this article with assistance from Research Economist Arturo Espinoza. For further information, don’t hesitate to contact us via firstname.lastname@example.org or 1300 169 870.
Table 1. Carbon markets worldwide
|Jurisdiction and Name||Type of Market||Year Started||Price||Global Emissions Covered %||Implementation Status|
|New Zealand ETS||ETS||2010||$34.20||0.31||Implemented|
|Mexico Pilot ETS||ETS||2023||N/A||0.49||Implemented|
|China National ETS||ETS||2021||$8.15||9.02||Implemented|
|Shanghai Pilot ETS||ETS||2014||$8.72||0.44||Implemented|
|Shenzhen Pilot ETS||ETS||2013||$8.77||0.28||Implemented|
|Chongqing pilot ETS||ETS||2014||$4.66||0.37||Implemented|
|Hubei Pilot ETS||ETS||2014||$6.96||0.47||Implemented|
|Guangdong Pilot ETS||ETS||2014||$12.34||0.77||Implemented|
|Fujan Pilot ETS||ETS||2018||$4.66||0.47||Implemented|
|Tianjin Pilot ETS||ETS||2014||$4.60||0.38||Implemented|
|Canada Federal OBPS||ETS||2021||$48.03||0.24||Implemented|
|Massachusetts ETS RGGI||ETS||2009||$12.05||0.39||Implemented|
|Nova Scotia CaT||ETS||2022||$20.87||0.26||Implemented|
|New Brunswick ETS||ETS||2022||$48.03||0.24||Implemented|
|British Columbia GGIRCA||ETS||2021||$18.47||0.23||Implemented|
|Newfoundland and Labrador ETS||ETS||2021||$48.03||0.24||Implemented|
|Australian Safeguard Mechanism||ETS||N/A||$10.64||0.23||Scheduled|
|Manitoba ETS||ETS||N/A||N/A||–||Under consideration|
|Pennsylvania ETS||ETS||N/A||N/A||–||Under consideration|
|Chile ETS||ETS||N/A||N/A||–||Under consideration|
|Brazil ETS||ETS||N/A||N/A||–||Under consideration|
|Colombia ETS||ETS||N/A||N/A||–||Under consideration|
|Gabon ETS||ETS||N/A||N/A||–||Under consideration|
|Nigeria ETS||ETS||N/A||N/A||–||Under consideration|
|Malaysia ETS||ETS||N/A||N/A||–||Under consideration|
|Japan ETS||ETS||N/A||N/A||–||Under consideration|
|Thailand ETS||ETS||N/A||N/A||–||Under consideration|
|Taiwan ETS||ETS||N/A||N/A||–||Under consideration|
|Pakistan ETS||ETS||N/A||N/A||–||Under consideration|
|EU27 ETS||ETS||N/A||N/A||–||Under consideration|
|Moldova ETS||ETS||N/A||N/A||–||Under consideration|
|Ukraine ETS||ETS||N/A||N/A||–||Under consideration|
|Turkey ETS||ETS||N/A||N/A||–||Under consideration|
|Georgia ETS||ETS||N/A||N/A||–||Under consideration|