Ninepoint Carbon Credit ETF

An alternative mutual fund

Canadian First:

First Carbon Credit mutual fund in Canada.

Emerging Asset Class:

Access a US$851 billion market which has grown by 18x since 2017.1

Easy access:

Structured as an alternative mutual fund offering Series A, F, S, SF, Q, QF, D on Fundserv and as an ETF series on the NEO Exchange (NEO:CBON / CBON.U).

Diversification:

Carbon Credit investments are expected to demonstrate low or negative correlation to traditional asset classes.

Global Exposure:

The Fund will primarily invest in global carbon emissions allowance futures and will initially include:

• European Union ETS (EUA) – Covers 40% of EU’s total emissions
• California/Quebec (CCA) – Covers 75% of total emissions
• US Eastern States (RGGI) – Covers 10% of Eastern US total emissions
•United Kingdom (UKA) – Covers 31% of UK's total emissions

1 Refinitiv, “Carbon Market Year in Review 2021”.
Global carbon markets value surged to record $851 bln last year-Refinitiv (Reuters - January, 2022).

Fund Objective

The Fund seeks to provide long-term capital appreciation by investing primarily in global carbon emissions allowance futures.

Investment Strategies

The Fund seeks to achieve its investment objectives by primarily investing directly in carbon allowance futures. The Fund will initially invest in the major carbon allowance futures globally, namely, the European Union Allowance (the “EUA”), the California Carbon Allowance (the “CCA”) and the Regional Greenhouse Gas Initiative (the “RGGI”, collectively with the EUA and the CCA, the “Initial Constituents”).

 

Sector Allocation as of 05/31/2022

Currency Weight
Treasury Bill (USD) 90.73
USD Cash 7.51
GBP Cash 1.53
CAD Cash 1.5

Sector Allocation (Notional) as of 05/31/2022

Futures Weight
Calif Carbon Allowance Vint Dec 22 24.61
Rggi Vintage 2022 Future Dec 2022 24.09
Ice Ecx Emission Eua Dec 22 24
UK Emission Allowance Dec 22 23.97
Net Cash And Equivalents 3.32

An Emerging Asset Class

In the energy transition economy, many believe setting a price on carbon, and allowing that price to rise, is one of the best ways to encourage polluters to limit emissions and drive innovation in green technology.

According to the European Commission, companies covered by the European Union Emission Trading System (ETS) reduced emissions by about 35% between 2005 and 2019. In the United States, California launched its own ETS in 2013, and have since reduced emissions from sources covered by the ETS by 10% from 2013 to 2018.

Emissions Trading Systems (ETS) and Carbon Credits

In an emissions trading system - sometimes referred to as a cap-and-trade system, a regulator or government-entity sets a policy objective to reduce emissions in their region and sets a cap on total emissions allowable. Within an emissions trading system, the regulator splits the cap into carbon allowances or credits. A company regulated under the emission trading system can acquire carbon credits from the regulator, purchase through secondary markets, or reduce its emissions.

After each compliance period, regulated companies must surrender enough carbon credits to cover its emissions, or be heavily fined. Each year the regulator reduces the total number of allowances available, thereby achieving lower emissions targets.

What is a Carbon Credit?

A carbon credit is a permit allowing the holder to emit carbon dioxide or other greenhouse gases. One carbon credit represents one ton of CO2.

Source: Ministère de l’Environnement et de la Lutte contre les changements climatiques.

A unique investment opportunity

According to financial market data provider Refinitiv, the total value of global carbon market reached US$851 billion in 2021.1 Energy consulting firm Wood Mackenzie estimates that the global emissions trading market could be worth as much as $22 trillion by 2050.2

ETS systems are operating in 38 countries covering over 40% of global GDP. Some of the largest ETSs globally include:

• EU ETS
• California/Quebec
• US Eastern
•United Kingdom (UKA)

1 Refinitiv, “Carbon Market Year in Review 2021”.
2 Wood Mackenzie, “COP26: Make or Break for Global Emissions Trading”.

 

Ninepoint Carbon Credit ETF

Frequently Asked Questions

Q: What is a Carbon Credit?
A: A carbon allowance or carbon credit is a permit allowing the holder to emit carbon dioxide or other greenhouse gases.1 One carbon credit represents the right to emit one ton of carbon dioxide or carbon dioxide equivalent gases. This term is commonly used in an Emissions Trading System (the “ETS”). Commodity futures contracts linked to the value of carbon allowances or carbon credits are known as carbon credit futures.


 

Q: What is an Emissions Trading System (the “ETS”)?
A: In an emissions trading system - sometimes referred to as a cap-and-trade system, a governmental entity sets a policy objective to reduce emissions in their jurisdiction by establishing a regulatory authority which sets targets for major emitters. The regulatory authority sets a cap on total emissions within the emissions trading system and splits the cap into carbon allowances or credits. To achieve compliance, a regulated company under the emission trading system can acquire carbon allowances from the regulator for free or through an auction, purchase through secondary markets, or reduce its emissions. After each compliance period, regulated companies must surrender enough carbon credits to cover its emissions, or they will be liable to heavy fines. In some emissions trading systems, companies may use offset credits generated from regional or international projects towards a small percentage of their compliance requirements. Each year the regulator reduces the total number of allowances available, thereby achieving lower emissions targets. Below is an illustration of an emissions trading system:

what is an emission trading system (the ets)

Source: Ministère de l’Environnement et de la Lutte contre les changements climatiques.


Q: The history of ETS
A: During the 1970s and 1980s, acid rain was one of the biggest environmental problems globally. At the time, coal burning power plants were sending up too much sulfur dioxide, which was falling back to earth in the form of acid rain, damaging soil, forests, and infrastructure. Therefore, in 1990, the US government passed a law forcing polluters to pay for their emissions. This is called a cap-and-trade system.2 Later on, the 1997 Kyoto Protocol and 2005 Paris Agreement explicitly supported the ongoing growth of cap-and-trade systems. During the years, different countries and regions set up their own carbon ETSs. Most recently, a deal was reached on the Glasglow COP 26 to standardize an international carbon trading market.


Q: How big is the global carbon market?
A: According to financial market data provider Refinitiv, the total value of global carbon market reached €238 billion in 2020.3 Energy consulting firm Wood Mackenzie estimates that the global emissions trading market can be worth as much as $22 trillion by 2050.4

As of 2021, ETS systems are operating in 38 countries covering over 40% of global GDP.5 The three major ETS markets globally are EU ETS, California/Quebec, and US Eastern States (RGGI). Below is an illustration of the global carbon market:

How big is the global carbon market

Data Source: Partnership for Market Readiness; International Carbon Action Partnership. 2021. Emissions Trading in Practice, Second Edition: A Handbook on Design and Implementation. World Bank, Washington, DC. © World Bank.
https://openknowledge.worldbank.org/handle/10986/35413 License: CC BY 3.0 IGO.
Image Source: The World Bank, Adapted from International Carbon Action Partnership (ICAP) 2021.


Q: How much carbon emissions are covered under the major ETSs?
A: As at the end of 2021, the EU ETS is trading around €75/ton, the California/Quebec ETS is trading around $30/ton, RGGI ETS is trading around $10/ton.6 Below is a price history of the major ETSs:

How much carbon emissions are covered under the major ETSs

Data Source: Partnership for Market Readiness; International Carbon Action Partnership. 2021. Emissions Trading in Practice, Second Edition: A Handbook on Design and Implementation. World Bank, Washington, DC. © World Bank.
https://openknowledge.worldbank.org/handle/10986/35413 License: CC BY 3.0 IGO.


Q: What sectors are covered under ETS?
A: The chart shows the sector coverage of each ETS. Globally, most ETSs cover electricity generation and industrial emissions. Currently, the EU ETS covers around 40% of the EU’s greenhouse gas (GHG) emissions; the California ETS covers around 75% of California’s GHG emissions; the RGGI covers around 10% of RGGI’s GHG emissions.7

The sector coverage is largely dependent on the jurisdiction’s decision as to which gases to include in the ETS.5 Globally, the primary greenhouse gas - carbon dioxide is covered by all existing ETSs. Many ETSs also include other types of gases. Below figure shows the gases covered in existing ETSs:

Jurisdictions jurisdictions
Source: The World Bank. Source: ICAP. (2021). Emissions Trading Worldwide: Status Report 2021. Berlin: International Carbon Action Partnership.

 


Q: What is the cost for non-compliance?
A: The cost for non-compliance is heavy fines.
Heavy fines would be imposed if a company fails to surrender enough allowances at the end of each compliance period. In the three major emissions trading systems, the fines are as following:

  • EU: €100/t fine in addition to surrendering the equivalent amount of missing allowances.8
  • California/Quebec: Each missing credit and three additional credits for each missing credit.9
  • RGGI: Imposed by each State. In the case of excess emissions, three times the amount of excess emissions must be surrendered.9

Q: Can carbon emissions be reliably measured and reported?
A: Yes. In most jurisdictions, GHG emissions data reports and underlying data are required to be measured, reported and verified by government or independent accredited verifiers, prior or post submission to the local regulator.


Q: Why is an Emissions Trading System also referred to as Cap-and-Trade?
A: Emissions trading systems are also referred to as Cap-and-Trade because most ETSs operate under the Cap-and-Trade principle - The supply of total number of allowances is capped and the cap is reduced over time to ensure that actual emissions decline. All else equal, the lower the cap, the higher the carbon price will be and the stronger the incentive to reduce emissions.

Generally speaking, the cap should be aligned with the jurisdiction’s overall mitigation target. In California’s case, the emissions cap is 334.2 million tonnes of carbon dioxide equivalent by 2020. During the period of 2021-2030, the cap is set to decline by about 4% per year to reach 200.5 million tonnes of carbon dioxide equivalent in 2030, which is around 40% below 334.2 million tonnes of carbon dioxide equivalent.9

cap and trade

Source: Centre for Climate and Energy Solutions.


Q: Is Cap-and-Trade working?
A: Since the adoption of ETSs in many jurisdictions globally, there has been clear, credible evidence that carbon emissions have declined in each regulated jurisdiction. According to the European Commission, companies covered by the EU ETS reduced emissions by about 35% between 2005 and 2019.10 In the United States, California launched its own ETS in 2013, since then, the emissions from sources covered by the ETS declined 10% from 2013 to 2018.11

Q: What happens to the revenue from auctions?
A: Auction revenues are often used to support low-carbon innovation and fund additional climate and energy related initiatives. See below chart for more details:

what happens to revenue from auctions

Source: ICAP. Emissions Trading Worldwide: Status Report 2021. Berlin: International Carbon Action Partnership. 2021. Retrieved from https://icapcarbonaction.com/en/icap-status-report-2021.


Q: How do carbon allowance futures trade, and do the carbon allowance futures the fund proposes to hold trade on an exchange?
A: Yes, the carbon allowance futures our fund proposes to hold all trade on the Intercontinental Exchange (the “ICE”).

The three initial constituents of the fund are the European Union Allowance (the “EUA”), the California Carbon Allowance (the “CCA”) and the Regional Greenhouse Gas Initiative (the “RGGI”).


Q: Why do we need a secondary carbon market?
A: A secondary carbon market helps support a proven environmentally effective policy choice through:

  • Enhanced transparency: Facilitating the price discovery of carbon which in turn helps companies’ strategic planning and policymaker’s decision-making.
  • Providing flexibility: Giving companies flexibility to decide how and when to manage carbon emissions.
  • Managing risks: Helping transfer risks (e.g. price risk) between counterparties.
  • Promoting innovation: Encouraging carbon market participation, incentivizing businesses to discover more sustainable business models.

Q: Does Canada have Emissions Trading System?
A: Yes! Quebec launched its own cap-and-trade system in 2013, the system was linked to California in 2014 under the Western Climate Initiative, forming North America’s largest carbon market and the first designed and operated by sub-national governments in different countries.12 Ontario briefly joined in 2018 and then repealed after a few months when the new provincial government came in.

 

FOOTNOTES
1 Environment Protection Authority Victoria. (n.d.). Climate change – glossary of key terms. Climate change glossary - EPA Victoria. Retrieved from https://web.archive.org/web/20100912151614/http://www.epa.vic.gov.au/climate-change/glossary.asp
2 YouTube. (2021). How do carbon markets work? | The Economist. YouTube. Retrieved from https://www.youtube.com/watch?v=m5ych9oDtk0
3 Carbon Market Year in Review 2020. Refinitiv. (n.d.). Retrieved from https://www.refinitiv.com/content/dam/marketing/en_us/documents/reports/carbon-market-year-in-review-2020.pdf
4 Wood Mackenzie. (2021, August 11). COP26: Make or break for Global Emissions Trading. Wood Mackenzie. Retrieved from https://www.woodmac.com/news/opinion/cop26-make-or-break-for-global-emissions-trading/
5 Partnership for Market Readiness; International Carbon Action Partnership. 2021. Emissions Trading in Practice, Second Edition: A Handbook on Design and Implementation. World Bank, Washington, DC. © World Bank. https://openknowledge.worldbank.org/handle/10986/35413 License: CC BY 3.0 IGO.
6 Carbon Pulse. (n.d.). Retrieved from https://carbon-pulse.com/
7 ICAP. Emissions Trading Worldwide: Status Report 2021. Berlin: International Carbon Action Partnership. 2021. Retrieved from https://icapcarbonaction.com/en/icap-status-report-2021
8 EU Emissions Trading System (EU ETS). International Carbon Action Partnership. (n.d.). Retrieved from https://icapcarbonaction.com/en/?option=com_etsmap&task=export&format=pdf&layout=list&systems%5B%5D=43
9 Carbon Market Business Briefs. IETA. (n.d.). Retrieved from https://www.ieta.org/carbonmarketbusinessbriefs
10 The EU emissions trading system in 2020: Trends and projections. European Environment Agency. (n.d.). Retrieved from https://www.eea.europa.eu/themes/climate/the-eu-emissions-trading-system/the-eu-emissions-trading-system
11 Enhesa. (2021, September 20). Keeping tabs on Carbon Emissions Reduction Trends. Enhesa. Retrieved from https://www.enhesa.com/resources/article/keeping-tabs-on-carbon-emissions-reduction-trends/
12 The Carbon Market, a Green Economy Growth Tool! (n.d.). Retrieved from https://www.environnement.gouv.qc.ca/changementsclimatiques/marche-carbone_en.asp

 

Stock chart by TradingView.

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), and other expenses all may be associated with investing in the Funds. Please read the prospectus carefully before investing. 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 information provided is general in nature and is provided with the understanding that it may not be relied upon as, nor considered to be, the rendering or tax, legal, accounting or professional advice. Readers should consult with their own accountants and/or lawyers for advice on the specific circumstances before taking any action.

Ninepoint Partners LP: Toll Free: 1.866.299.9906. DEALER SERVICES: CIBC Mellon GSSC Record Keeping Services: Toll Free: 1.877.358.0540

Are You An Accredited Investor?

The minimum subscription amount is $150,000.00 in all jurisdictions, unless you meet the definition of "accredited investor" under National Instrument 45-106 Prospectus and Registration Exemptions.

If you meet the definition "accredited investor" (see below), you may invest a minimum of $25,000. Please consult the Offering Memorandum to determine your qualification status. Investment Advisors should consult their company's internal policies.

The Subscriber, or one or more beneficial purchasers for whom the Subscriber is acting, is (i) a resident of, or the purchase and sale of securities to the Subscriber is otherwise subject to the securities legislation of one of the following: British Columbia, Alberta, Saskatchewan, Manitoba, Ontario, Québec, Newfoundland and Labrador, Nova Scotia, New Brunswick, Prince Edward Island, North West Territories, or Nunavut, and the Subscriber is (and will at the time of acceptance of the Subscription be) an accredited investor within the meaning of National Instrument 45-106 Prospectus and Registration Exemptions ("NI 45-106") because the Subscriber is one of the following:

(a) a Canadian financial institution, or a Schedule III bank;
(b) the Business Development Bank of Canada incorporated under the Business Development Bank of Canada Act (Canada);
(c) a subsidiary of any person referred to in paragraphs (a) or (b), if the person owns all of the voting securities of the subsidiary, except the voting securities required by law to be owned by directors of that subsidiary;
(d) a person registered under the securities legislation of a jurisdiction of Canada as an adviser or dealer, other than a person registered solely as a limited market dealer under one or both of the Securities Act (Ontario) or the Securities Act (Newfoundland and Labrador);
(e) an individual registered or formerly registered under the securities legislation of a jurisdiction of Canada as a representative of a person referred to in paragraph (d);
(f) the Government of Canada or a jurisdiction of Canada, or any crown corporation, agency or wholly owned entity of the Government of Canada or a jurisdiction of Canada;
(g) a municipality, public board or commission in Canada and a metropolitan community, school board, the Comité de gestion de la taxe scolaire de l'île de Montréal or an intermunicipal management board in Québec;
(h) any national, federal, state, provincial, territorial or municipal government of or in any foreign jurisdiction, or any agency of that government;
(i) a pension fund that is regulated by the Office of the Superintendent of Financial Institutions (Canada), a pension commission or similar regulatory authority of a jurisdiction of Canada;
(j) an individual who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000;
(k) an individual whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;
(Note: If individual accredited investors wish to purchase through wholly-owned holding companies or similar entities, such purchasing entities must qualify under section (t) below, which must be initialled.)
(l) an individual who, either alone or with a spouse, has net assets of at least $5,000,000;
(m) a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements;
(n) an investment fund that distributes or has distributed its securities only to:
  1. a person that is or was an accredited investor at the time of the distribution,
  2. a person that acquires or acquired securities in the circumstances referred to in sections 2.10 [Minimum amount investment] or 2.19 [Additional investment in investment funds] of NI 45- 106, or
  3. a person described in paragraph (i) or (ii) that acquires or acquired securities under section 2.18 [Investment fund reinvestment] of NI 45-106;
(o) an investment fund that distributes or has distributed securities under a prospectus in a jurisdiction of Canada for which the regulator or, in Québec, the securities regulatory authority, has issued a receipt;
(p) a trust company or trust corporation registered or authorized to carry on business under the Trust and Loan Companies Act (Canada) or under comparable legislation in a jurisdiction of Canada or a foreign jurisdiction, acting on behalf of a fully managed account managed by the trust company or trust corporation, as the case may be;
(q) a person acting on behalf of a fully managed account managed by that person, if that person:
  1. is registered or authorized to carry on business as an adviser or the equivalent under the securities legislation of a jurisdiction of Canada or a foreign jurisdiction; and
  2. Ontario, is purchasing a security that is not a security of an investment fund;
(r) a registered charity under the Income Tax Act (Canada) that, in regard to the trade, has obtained advice from an eligibility adviser or an adviser registered under the securities legislation of the jurisdiction of the registered charity to give advice on the securities being traded;
(s) an entity organized in a foreign jurisdiction that is analogous to any of the entities referred to in paragraphs (a) to (d) or paragraph (i) in form and function;
(t) a person in respect of which all of the owners of interests, direct, indirect or beneficial, except the voting securities required by law to be owned by directors, are persons that are accredited investors;
(u) an investment fund that is advised by a person registered as an adviser or a person that is exempt from registration as an adviser, or;
(v) a person that is recognized or designated by the securities regulatory authority or, except in Ontario and Québec, the regulator as an accredited investor.

 

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