The launch last week of a carbon credits exchange-traded fund was widely praised for its innovative approach, but some industry observers warn that if the concept proves too effective, there could be ” unintended consequences ”.

Unlike competing ETFs, which offer exposure to carbon credit futures prices, the SparkChange Physical Carbon EUA ETC (CO2), which launched on the London Stock Exchange on Thursday, is the first ETF to invest directly and exclusively in allowances. of the EU (or EUA), otherwise known as a pollution permit.

The idea is that by buying the ETF, investors take the carbon allowances out of the market and therefore prevent polluters from using them, increasing the cost of the remaining EUAs and helping to prevent emissions from occurring in the first place.

EUA prices have almost doubled since the start of the year, going from around € 35 per tonne at the start of January to a peak of almost € 65 at the end of September.

The launch day was a success. Assets under management grew from $ 1 million at the opening bell to more than $ 11 million at market close, according to Hector McNeil, co-founder of HanETF, the white-label ETF provider that s ‘is associated with SparkChange to bring the ETF to market.

“Buying a physically supported carbon allowance and effectively withdrawing a polluter’s permit to pollute does exactly that – it forces polluters to cut emissions now,” said Jan Ahrens, research manager at SparkChange. He noted that USA, with their controlled supply, differed from uncapped carbon offsets, although both are sometimes referred to as carbon credits.

Kenneth Lamont, senior fund analyst for passive fund research at Morningstar Europe, said the concept of investing directly in the EUA through the ETF was an interesting development that offered distinct advantages over carbon credit ETFs. based on futures contracts.

“By tracking physical contracts, the new ETC perfectly avoids the additional price noise created by tracking futures contracts,” Lamont said. “This is especially important when the futures market is in contango – [a phenomenon that] occurs when the price of carbon allowances is expected to increase. In this environment, investors can lose money even when the spot price of carbon credits increases.

US investors have access to four ETFs investing in carbon futures: the KraneShares Global Carbon ETF (KRBN); ETF KraneShares California Carbon Allowance (KCCA); ETF KraneShares European Carbon Allowance (KEUA); and iPathA Series B Carbon ETN (GRN).

WisdomTree relaunched its carbon futures ETF (CARB) on the LSE in August of this year.

However, some industry watchers have issued a note of caution.

Patrick Wood Uribe, chief executive of Util, a provider of sustainable investing data, said one-dimensional actions could have “unintended consequences.”

“What if you allow investors to restrict the supply of allowances? ” he said.

Wood Uribe argued that one of the outcomes could be rising energy prices, which in turn could have negative social consequences if prices rise too quickly. Polluters might also just decide it’s worth paying for the trade, he said.

Wood Uribe said he welcomes the idea of ​​trying to solve a non-financial problem financially, but added, “It underscores how important it is to think holistically about these things.”

Lana Khabarova, founder of SustainFi, a sustainable and impact investing site, agreed that investors who are serious about buying the ETF should think carefully about it.

She said that while there is no intention to increase the amount of EUA available, Article 29a of the EU Emissions Trading Directive allows authorities to increase the amount of EUA available. offer of allowances in the event of significant and sustained price increases, which could affect the value of ETF holdings.

Khabarova also said that EUAs were already being used by hedge funds to hedge their exposure to investments in oil and gas stocks, suggesting that this ETF could be used in the same way.

But, despite potential problems, she said she welcomed the new fund. “I think it’s great that investors can invest in carbon credits, whether it’s through futures or physical credits. “

She said carbon prices were “far too low to meet the Paris Agreement targets” and must exceed $ 100 per tonne.

Lamont agreed that the positive attributes of the product cannot be ignored. “This is a great example of an ETC / ETF providing access to markets that were once the preserve of institutional investors,” he said.

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