Big Money Joins Rush for Carbon, Fueling Bets Prices Will Soar

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American investors are joining a rush to buy carbon permits, prompting bets that the cost of pollution may be about to rally further after European prices hit a record high.

Total assets of the KFA Global Carbon ETF, the biggest exchange-traded fund listed in the U.S. that tracks carbon markets, have surged to almost $60 million from just $3 million six months ago. Most of the increase has come since U.S. President Joe Biden signaled after his January inauguration that climate change would be a key policy focus.

The fund’s growth is the first hard evidence that U.S. institutional investors are taking interest in a market that used to be the realm of a few hedge funds and the companies required to buy pollution permits. The involvement of big money is showing up in EU carbon prices, which have rallied more than 30% this year to break through $50 for the first time.

“From investors’ perspectives, climate and carbon are rising to the top,” said Eron Bloomgarden, founder and partner at Climate Finance Partners, one of the advisers to the ETF. “The Biden administration coming in the U.S. and signaling that climate is on top of the agenda, that’s been quite helpful.”

Big Money Joins Rush for Carbon, Fueling Bets Prices Will Soar

Generally, the higher the carbon price goes, the more expensive it becomes for companies to burn fossil fuels. That helps create a financial incentive to switch to technologies that cut emissions.

But there’s also a risk that if the price rises too far, too fast, companies will buckle under the cost before they’re able to invest in equipment that emits less CO2 into the atmosphere. More than 11,000 power and industrial companies in the EU are required to buy permits to account for their emissions.

About two-thirds of the KFA Global Carbon ETF is invested in futures for carbon contracts in the European Union’s emissions trading system, the world’s largest carbon market. The fund also invests in the U.S. carbon market, which is still fragmented.

Big Money Joins Rush for Carbon, Fueling Bets Prices Will Soar

Most of the buying so far has come from U.S. institutional clients and pension funds, according to James Maund, head of capital markets at Krane Funds Advisors, the investment manager for the ETF. Financial investors, in general, have rapidly built up positions to bet that the price will increase, according to data provided by ICE Futures Europe.

The ETF hasn’t yet been tapped on a large scale by retail investors, according to Maund, but that may change as carbon markets become better known. Global Macro Investor’s Raoul Pal told his more than 400,000 Twitter followers earlier this month that EU carbon is “one of the greatest macro trades no one is involved in.” People replied by asking what ETFs they could use to get exposure.

But too much hype could damage the market if companies struggle to keep up, according to Marcus Ferdinand, head of European carbon and power analytics at research company ICIS.

“This has the potential to silently shift this market from being an environmental policy instrument to a financial puppet in the hands of unsolicited traders,” Ferdinand said. That could undermine “the main purpose of this market, to reduce emissions at the lowest cost,” he said.

©2021 Bloomberg L.P.

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