Carbon trading begins to pick up with prices accelerating

Carbon prices are set for a steady increase following the European Union’s decision to cut emissions 60% by 2030. 

A Joe Biden victory would further add to the momentum, encouraging investors to find ways to benefit from the trend.

Carbon Cap says the annualised composite returns for carbon is 21.6% compared to five years ago, when the market was relatively depressed. This compares to 8.7% from equities and 3.6% from bonds which each displayed greater volatility

Investment in carbon emissions could be an option, following pledges by politicians to tighten up their carbon emissions trading markets.

“Emissions markets are in a second renaissance,” says Mike Azlen, chief executive of Carbon Cap Management, a boutique investor in carbon futures. 

“A lot of learning has taken place. We really believe we are in carbon markets 2.0.”

His key backer is Swiss private bank Reyl & Cie founded by Dominique Reyl, whose son Francois is chief executive. 

In October, Reyl added to its clout with family offices by forging a partnership with a private bank owned by Intesa Sanpaolo of Italy which ends up with 69% of the combined business.

Azlen is keen to win business from family offices. He is prepared to offer separate managed accounts under the right circumstances. 

Carbon Cap invests a fifth of its performance fee to purchase and remove carbon from the atmosphere, which could impress next gen. 

The carbon price has turned on a sixpence this year, skidding to a low of 15 euros a tonne in May when the pandemic hit industrial output. It was trading at 27 euros at the end of September then spiked to 30 euros when the EU confirmed its determination to tighten up its carbon emissions market. 

City analysts expect a sharp rise in carbon prices. EU analysts believe 44 euros can be hit by 2030. Under an “all-in” scenario it thinks 60 euros can be achieved. 

Carbon Cap says the annualised composite returns for carbon is 21.6% compared to five years ago, when the market was relatively depressed. This compares to 8.7% from equities and 3.6% from bonds which each displayed greater volatility. 

Azlen has already developed two asset managers comprising Asset Alliance International, part of a group managing $4 billion and Frontier with $700 million.

Carbon Cap is far smaller, but Azlen is deeply concerned by rising temperatures and convinced steps will be taken to stabilise the situation.

Extreme forest fires and polar ice melt have heaped up the pressure this year, although President Trump’s lack of interest has been dispiriting.

In a report for the Commodity Futures Trading Commission this year, former Goldman Sachs quant Bob Litterman called for effective carbon pricing, as a matter of urgency. 

Through emissions trading, governments put a cap on emissions. If they go through the cap polluters need to pay for the right to emit them through a trading system.

The higher the price the greater the incentives to reduce emissions by cutting back production or switching to cleaner fuels. 

EU emissions trading was introduced in 2005 but governments fell into bad habits by offering their companies allocations which were far too generous.

A rebasing process this year has eliminated excessive emission permits, now policed by a Market Stability Reserve which can limit permits.

Emissions trading will spread across more sectors and aim to put limits on cross-border emissions. 

Reuters reported on October 23 that European politicians were reluctant to change agricultural standards to meet its 2050 zero-carbon target. But the EU has been resolute in improving emissions trading.

Emissions trading takes place in three other regions which are also sufficient liquid for Carbon Cap to access them.

The New Zealand Unit has lately toughened up its game and introduced carbon auctions. The Western Climate Initiative links California with Canadian provinces to trade emissions although there have been implementation delays. 

The mandatory Regional Greenhouse Gas Initiative covers US states in the North East and a mandatory approach.

Despite foot-dragging by regional coal-fired power plants and difficulties in complying with 2030 pledges agreed in Paris, China has vowed to produce zero emissions by 2060. 

Japan has just wheeled out a plan to be zero carbon by 2050. 

“The momentum is moving in the right direction,” says Carbon Cap head of research Alex Child. 

His core fund aims to invest in two complementary strategies. One of them seeks to generate risk-controlled returns from a rising carbon price. Another uses arbitrage and relative value deals across physical carbon, futures and options. 

Carbon Cap hedges against falls in carbon prices, but does not short the sector, as a matter of principle.