Bill Schmick | The retired investor: The carbon market is coming of age | Business

At the start of this year, the global carbon price was $ 24.05 per tonne of CO2. In order to meet the emissions reduction targets of the members of the Paris climate agreement, prices must reach a range of $ 50 to $ 100 per tonne of CO2. This makes buying carbon an attractive investment.

Persistent concerns about climate change have spawned several emissions trading systems over the past decade. The reasoning is simple: if left unchecked, carbon emissions (among other factors) will have a material impact on our environment and cause serious damage to the global economy.

The ratification of the 2007 Kyoto Protocol by global governments effectively rose to the challenge, setting rules on carbon emissions and, in doing so, created an entirely new asset class.

Today, whatever system a government chooses, it essentially has a cap and trade system. Carbon emitters are required by law to either limit carbon emissions to the level assigned by their government, purchase additional carbon emission permits from the market, or pay a fine for exceeding their limits. program. This created a new product – carbon emission permits.

The European Union Emissions Trading System (EU ETS) is by far the largest of its kind in the world. It has also become the model for most of the world’s governments. Carbon emissions, according to the Financial Times, have been the best performing commodity in recent years, increasing fivefold in the past four years. At the end of 2020, the world’s three largest carbon futures exchanges had a market size of $ 260 billion.

In April 2021, on Earth Day, President Joe Biden hosted a leaders’ climate summit and pledged to reduce emissions by 50 to 52 percent from 2005 levels by 2030. The United States were just one country among many.

The EU, UK and China have pledged similar, if not larger, cuts. Pricing carbon emissions was the central theme of the summit and is the key and fundamental element in achieving the summit reduction targets.

Prices have risen by 70% this year, in response to ambitious targets set by the EU, which targets a 55% reduction in greenhouse gases by 2030 and net zero by 2050. Hope is that while the price of carbon credits continues. to increase, polluting companies will at some point decide to invest in reducing emissions rather than buying increasingly expensive credits.

Reopening global economies is also a bullish development for carbon pricing, as industrial companies and utilities increase carbon production and emissions, driving even more demand for carbon credits.

And to add to this trend, new carbon markets seem to appear every month. Cap-and-trade carbon pricing currently exists in 24 national and subnational markets. 19 other markets are in the development or consolidation phase.

Some US institutional investors and pension funds have access to this market either directly or through exchange-traded funds (ETFs). The retail crowd is still relatively absent from this asset class.

Also, as far as I know, the carbon market is not correlated with other risky assets. The underlying asset, the EU ETS, is a liquid instrument with a well understood prospective risk premium. Its risk-adjusted returns have outperformed traditional asset classes such as stocks, bonds and other commodities. In my opinion, it seems like it’s about making real money in the long run and, at the same time, contributing to the common good by helping to tackle climate change and a vastly improved global environment.

Bill Schmick is registered as an investment advisor representing Onota Partners Inc. in the Berkshires. He can be reached at 413-347-2401 or emailed billiams1948@gmail.com.


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