Measuring true emission reductions is a major challenge in the creation of green financial products – and opens the door for greenwashing. Notably, the carbon credit (or offset) market suffers from a lack of transparency and environmental integrity.
This paper develops a methodology to measure the impact of investing in an emerging asset class: carbon allowances from the EU Emissions Trading System.
By leveraging the Market Stability Reserve and a basic supply/demand model, this paper outlines a simple approach to quantify the emission reductions of holding carbon allowances.
- Quantifies the permanent prevention of emissions that results from investing in physical EU carbon Allowances (EUAs) in the EU Emissions Trading System (ETS)
- Examines why physically-backed investments create greater environmental impact than futures-based investments
- Proposes a methodology for calibrating an EUA position to achieve a desired environmental impact
- Discusses the environmental impact of a full EUA investment cycle i.e. buying, holding and selling EUAs. This contrasts with the impact created by buying and claiming carbon offsets, where no such investment cycle exists