Throughout the month of May, the global carbon market demonstrated robust performance in a time of heightened volatility in the broad market - CCA (California Carbon Allowances) posted a 7.2% monthly return while UKA (UK Allowances ) generated a 2.3% gain. EUA (European Union Allowances) and RGGI (Regional Greenhouse Gas Initiative Allowances) posted small losses, -0.5% and -1.3% respectively. During the same time, S&P 500 finished the month almost flat with a total return of 0.2%
In Europe, home to the largest carbon market by trading volume, EUA price experienced some volatility in the month of May. On May 18, the European Commission set out its full REPowerEU Plan that included multiple proposals with the aim to reduce the EU’s dependence on Russian fuels. European Commission also plans to raise €20 billion for the plan with the sale of EUAs out of its Market Stability Reserve. Market Stability Reserve (MSR) was established in 2014 to maintain the long-term price stability of EUA – the reserve conditions the availability of allowances to respond to overall economic conditions and supply/demand dynamics from world events such as the pandemic.
EUA prices fell as much as 7% from €92 to €85 amid this proposal. In the two weeks following this, EUA has been trading sideways. The best performing carbon market is CCA, which has been trading up steadily throughout the month, settling at 7.2% monthly return, following its bullish Q2 auction result.
In the asset management world, American investment management firm VanEck filed an application to launch Australia’s first carbon ETF. The ETF will track the ICE Global Carbon Futures Index.
The Ninepoint Carbon Credit ETF invests in carbon credit futures – futures that track the prices of carbon in compliant carbon markets globally. Unlike the conventional equity funds which invest in traditional stocks.
As of May, the fund allows market participants to access a basket of four of the world’s most liquid carbon futures markets by traded volume: the European Union Allowances (EUA); the California Carbon Allowances (CCA); the UK Allowances (UKA); and the Regional Greenhouse Gas Initiative Allowances (RGGI)1. As the global carbon credit market grows, the fund will evaluate and invest in additional carbon allowance futures contracts.
European Union Emissions Trading Scheme is the world's first major carbon market and a cornerstone of the EU’s policy to reduce greenhouse gas emissions cost-effectively. It is the largest carbon market by traded volume2. Approximately 11,000 installations are covered across European Union, plus Iceland, Norway, and Liechtenstein. The sectors covered under the system include power generation, energy-intensive industrial sectors and aviation within Europe, covers ~40% of the EU’s emissions3.
Since 2021, the price of the December 2022 futures increased from €35/t in January 2021 to €85/t in May 2022. As we discussed in our April commentary, three factors drove this persistent price increase since 2021. Firstly, more aggressive EU-wide climate policies including “Fit for 55” and phase 4 of the EU ETS starting from 2021 further limited the amount of EUA supply available in the market. Secondly, high gas prices made the demand for more carbon-intensive energy sources such as coal very high, especially during Q4 of 2021. Finally, extreme weather in Europe since 2021 led to surged energy demand, and thus translated directly into an increase in demand for EUA4.
The California Air Resources Board (CARB) and the Ministry of the Environment and Climate Change of the Canadian Province of Quebec have collaborated to form a single cap and trade market to govern emissions in their respective territories. In California, approximately 400 institutions have compliance obligations while an additional 200 are required to report their emissions, covering ~74% of California’s carbon emissions5. California has a series of longer-term climate targets including a 2030 state reduction target of 40% below 1990 levels and an objective of carbon neutrality by 2045.
Price rose steadily over the course of 2021, from $18 in Jan 2021 to $31 in Dec 20216.
As a replacement for the UK's participation in the EU emissions trading system (ETS), the new UK emissions trading system came into operation on January 1, 2021. The allowances trading under the UK ETS are referred to as United Kingdom Allowances (UKA). The first UKA auction took place in May 2021 and sold more than 6 million allowances at a market clearing price of GBP £447, since then, the UKA has been frequently trading at a premium to EUA.
The UK ETS currently covers approximately 2,000 installations in the power generation sector, aviation, and other energy intensive industries, similar to the scope of the EU ETS. According to Refinitiv, a total traded volume of 335 Mt UKAs transacted in 2021, making it the third most liquid ETS market globally, after EUA and CCA8.
During the Brexit negotiations, the UK government indicated that it would be open to consider the possibility of linking UKA with EUA. However, such idea has not been moving further since 2020 - It is worth noting that the linkage between Swiss ETS and EUA took almost a decade.
The RGGI is a cooperative, market-based effort among the US states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia to cap and reduce carbon emissions from the power sector, covering ~16% of RGGI’s total emissions9. Price rose steadily over the course of 2021, from $8 in Jan 2021 to $14 in Dec 202110.
Compliant companies (e.g. O&G companies), policymakers, and the general public participate in the carbon credit futures market for different reasons. Below are some of the key benefits of carbon credit futures trading:
For an emerging asset class like carbon credit, volatility management is at the heart of our fund strategy. Currently, the Ninepoint Carbon Credit ETF invests equally in the four major ETS markets globally with quarterly rebalancing. This strategy has demonstrated resiliency in the unprecedented recent carbon market volatility.
Reasons for investors to consider Ninepoint Carbon Credit ETF
1Refinitiv, Carbon Market Year in Review 2021
2Refinitiv, Carbon Market Year in Review 2021
3International Carbon Action Partnership, Emissions Trading Worldwide: Status Report 2022 https://www.ecb.europa.eu/pub/economic-bulletin/focus/2022/html/ecb.ebbox202203_06~ca1e9ea13e.en.html
4International Carbon Action Partnership, Emissions Trading Worldwide: Status Report 2022
5Refinitiv, Carbon Market Year in Review 2021
6International Carbon Action Partnership, Emissions Trading Worldwide: Status Report 2022
7Refinitiv, Carbon Market Year in Review 2021
8International Carbon Action Partnership, Emissions Trading Worldwide: Status Report 2022
9Refinitiv, Carbon Market Year in Review 2021
10Refinitiv, Carbon Market Year in Review 2021
11Global carbon markets value surged to record $851 bln last year-Refinitiv (Reuters - January, 2022).
The Ninepoint Carbon Credit ETF is generally exposed to the following risks See the prospectus of the Fund for a description of these risks Absence of an active market for ETF Series risk, cap and trade risk, collateral risk, commodity risk, concentration risk, cybersecurity risk, derivatives risk, foreign currency risk, foreign investment risk, Halted trading of ETF Series risk, inflation risk, interest rate risk, liquidity risk, market risk, regulatory risk, securities lending, repurchase and reverse repurchase transactions risk, series risk, substantial securityholder risk, tax risk, trading price of etf series risk.
Ninepoint Partners LP is the investment manager to the Ninepoint Funds (collectively, the “Funds”). Commissions, trailing commissions, management fees, performance fees (if any), other charges and expenses all may be associated with mutual fund investments. Please read the prospectus carefully before investing. Mutual funds are not guaranteed, their values change frequently and past performance may not be repeated. The information contained herein does not constitute an offer or solicitation by anyone in the United States or in any other jurisdiction in which such an offer or solicitation is not authorized or to any person to whom it is unlawful to make such an offer or solicitation. Prospective investors who are not resident in Canada should contact their financial advisor to determine whether securities of the Fund may be lawfully sold in their jurisdiction.
The opinions, estimates and projections (“information”) contained within this report are solely those of Ninepoint Partners LP and are subject to change without notice. Ninepoint Partners makes every effort to ensure that the information has been derived from sources believed to be reliable and accurate. However, Ninepoint Partners assumes no responsibility for any losses or damages, whether direct or indirect, which arise out of the use of this information. Ninepoint Partners is not under any obligation to update or keep current the information contained herein. The information should not be regarded by recipients as a substitute for the exercise of their own judgment. Please contact your own personal advisor on your particular circumstances. Views expressed regarding a particular company, security, industry or market sector should not be considered an indication of trading intent of any investment funds managed by Ninepoint Partners. Any reference to a particular company is for illustrative purposes only and should not to be considered as investment advice or a recommendation to buy or sell nor should it be considered as an indication of how the portfolio of any investment fund managed by Ninepoint Partners is or will be invested. Ninepoint Partners LP and/or its affiliates may collectively beneficially own/control 1% or more of any class of the equity securities of the issuers mentioned in this report. Ninepoint Partners LP and/or its affiliates may hold short position in any class of the equity securities of the issuers mentioned in this report. During the preceding 12 months, Ninepoint Partners LP and/or its affiliates may have received remuneration other than normal course investment advisory or trade execution services from the issuers mentioned in this report.
Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540