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Want to know more about the carbon markets, what we do as a company, or how our products work? Check out our most frequently asked questions below. And if you still can’t find what you’re looking for please get in contact with us at firstname.lastname@example.org.
Carbon allowances create emission reductions in a regulated, capped environment, therefore directly contributing to reducing emissions. The environmental integrity of offsets vary significantly, with the majority of offsets avoiding an emissions increase, but not actually reducing emissions
Carbon allowances enable investors to invest their money in an asset that generates annual emission reductions like a “climate dividend”, and which can be divested later at a potential profit. Buying and retiring offsets is not an investment but a purchase/cost
Carbon allowance markets are highly standardised, regulated and much more liquid than voluntary offset markets. They provide scale to have a meaningful impact
For many investors, accessing the EUA market is challenging. One access route is to buy the EUAs outright. However, this requires a registry account, market access and the handling of a regulated digital commodity, creating a high level of operational complexity. Most real-money investors find the unconventional custody and settlement of EUAs very challenging. In contrast, carbon offsets are widely accessible and easy to purchase.
Carbon allowances are lesser-known among investors. In contrast, offsets are more familiar and relatively simpler to understand.
Two independent studies have found varying impact of buying, holding and selling 10m EUAs from 2021-2030: In a scenario run on LSE’s carbon market model (paper here), the researcher found an impact of 10.55m tonnes CO2 permanently reduced, while the research house ICIS found 19.19m tonnes CO2 permanently reduced. As both models have slightly different scope and configuration, SparkChange has compared both papers and standardised the results, finding that 14.3m tonnes of CO2 reductions can be attributed to holding 10m EUAs for one decade.
Units in SparkChange CO2 are physically-backed by regulated carbon allowances which are held by the fund. While investors hold physical permits, polluters cannot use them – directly reducing carbon emissions. There are also two powerful indirect ways the product tackles carbon. Withholding permits, through a mechanism (called MSR) written into EU law, results in additional permits being cancelled in future years. Moreover, increased scarcity and increased investor demand may lead to higher prices for the remaining carbon allowances, making it more expensive for polluters to continue using dirty fossil fuels and incentivising their switch to cleaner energy.
Yes. Under EU law, withholding EUAs triggers additional allowances being cancelled in the future. When an investor sells their EUAs this effect stops, but is not reversed, and the investor’s temporary ownership of EUAs creates permanent emissions reductions.
Carbon markets and regulation
As in every (commodity) market, prices for EUAs are driven by supply and demand. The biggest price driver is therefore the annual emissions of covered entities in the system, as corporates need to buy allowances for these. Emissions in the EU ETS mainly change if the production of energy intensive goods changes (like cement, steel, refined products etc), or the power demand changes and therefore more/less fossil fuels are burnt to produce the power.
In addition, however, demand can also be driven by stockbuilding or hedging, speculation or liquidation of excess allowances.
On the other hand, supply is largely fixed by the regulator. Any rumours or even decisions to change these laws can have a significant impact on prices.
Carbon taxes do not set a budget for carbon emissions. If decarbonisation technologies do not develop quickly or cheaply enough, firms will continue to pollute, so they are difficult to calibrate to a net zero pathway.
Cap-and-Trade systems are more efficient as they allow money to flow to the cheapest carbon abatement technologies first. A tax falls equally on all participants, whether they are close to a carbon price that would incentivise a switch or a long way below.
Historically, most ESG or sustainability-branded investment products focus on excluding certain companies’ shares or bonds from investment products, rather than investing actively to address the source of the problem. Some other products have come a little closer to direct carbon solutions have been focused on the voluntary offset market or the use of futures to access the EU ETS rather than holding the allowances themselves. Instead, SparkChange is the first ever listed investment to invest physically in removing carbon allowances from circulation – therefore it is the first listed investment product to directly limit carbon emissions.
Carbon allowances are a commodity that is in shortening supply. As the demand for emissions allowances will likely outstrip supply over the next few years, EUAs may well trade more expensively over time. SparkChange CO2 allows investors access to this underlying scarcity of carbon allowances. A survey of carbon market analysts suggests that prices may rise as high as €100 per EUA over the next few years, but the average analyst forecast is €60 for 2022 and €72 for 2025 (Source: Carbon Pulse). At current prices, that would imply an annual return of 4.3% over the next 4 years.
* Forecast is not a reliable indicator of future performance.
Many investors will purchase SparkChange CO2 for its Impact alone; see Environmental Impact above. Other investors may purchase SparkChange CO2 purely in anticipation of a medium-term increase in the trading price of EUAs. And finally, some investors may purchase SparkChange CO2 if they believe that their conventional equity and bond portfolios are implicitly short the cost of Emissions. The structuring of SparkChange CO2 as an Exchange Traded Product enables the asset class to be accessed by the widest possible range of investors, from Individuals to Wealth or Portfolio Managers.