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After six long years of extensive talks and negotiations over the COP26 strategy, the Paris Agreement Article 6 Rulebook was approved on 13 November 2021. Checking this box was the most critical part of the 2015 climate pact, which regulates how countries trade credits to emit CO₂. Additionally, the long-awaited Article 6 implementation is expected to help build structure and transparency on voluntary carbon markets that buy and sell carbon offsets.
Reuters reported the value of traded global markets for Co2 permits growing by 164% in 2021, reaching a staggering record of 851 billion euros, as published in Refinitiv's data. One of the most established carbon markets globally, the European Union's Emissions Trading System (EU ETS) is worth approximately $769 billion.
As estimated by McKinsey, the annual global demand for carbon offsets might reach 1.5-2.0 billion tonnes of CO2 by 2030 and as much as 7-13 billion tonnes by 2050. McKinsey also estimates that the demand for carbon credits will grow by 15 or more by 2030. In fact, McKinsey expects the carbon credits market will be worth $50 billion in 2030. Moreover, the voluntary carbon market reached billion dollars in annual transactions last year and shows no slowing in the high tempo.
The world's economies see the voluntary carbon market as one of the best solutions to reduce CO2 emissions. Moreover, with stakeholders showing immense interest in carbon market investing, experts expect its growth to continue in 2022. Carbon credits are a sure-fire solution for those looking to invest in markets they share their values with.
Before getting into the most lucrative stock opportunities in the carbon market, this is how carbon emissions credit works and how to invest in the CO2 market.
The technologies that minimize a company's carbon emission leave a "footprint" that creates units of value named carbon offset credits and systems for certifying, registering, and trading those credits.
The EU ETS is the critical weapon of choice to combat climate change in the European policy for reducing greenhouse gas emissions. In fact, EU ETS is the first and biggest primary carbon market globally, targeting to reduce CO2 emissions to a minimum of 55% by 2030. The ultimate goal is to become climate neutral by 2050, a significant milestone. Therefore, the emissions trading system called the cap and trade principle was established.
The cap and trade principle works so that the EU limits the maximum level of CO2 emissions for the industrial sector. If the CO2 emission gets lower, the EU moves the cap down, and companies that go beyond the limit will pay a fine. When it comes to companies, they can do it two ways; either reduce their pollution on their own or purchase carbon credits.
These credits are also called carbon allowances, which can be bought from companies that reduced their carbon footprint more than necessary and used by those that failed to meet the standard to cover the difference. Moreover, companies can sign a contract to sell and buy carbon credits as exchange-traded funds (ETFs).
Since the EU ETS marketplace controls the supply of these credits, it also influences the price, which makes the carbon market an undoubtedly exciting investment opportunity for investors, governments, and businesses.
The best thing about the voluntary sector of carbon offsets is that anyone can invest in ETFs that purchase the futures contracts mentioned above.
The suppliers to the carbon offset market are organizations, registries, and brokers that buy carbon offsets and package the projects together. With the new COP26 regulations ruling the market, the demand for these will grow and raise the price of these projects.
Although the organized carbon market ETFs are yet in their infancy, there are some promising offset futures options for investors with the desire to do their part in fighting climate change and reach long-term returns. Momentarily, the most dominant carbon offset solution is undoubtedly forestry.
With Article 6 of the Paris Agreement finally signed, carbon markets have reached a significant milestone. Voluntary carbon credits now represent credits generated from projects working to lower or banish greenhouse gas emissions.
The latter makes investing in carbon markets unique; they are created to help save the planet from the devastating effects of climate change without threatening ecosystems and biodiversity.
In essence, carbon markets help reach net-zero targets cost-effectively, with the possibility of generating additional revenues for CO2 emission reduction projects.
The conditions needed to abide by the Article 6 rules will require extensive and hard work for all parties involved. Regulators, industries, NGOs, and governments will have to do what they need to comply, which is expected to increase carbon market value.
And those who wish to enter the field as investors, project leaders, buyers, or sellers are set to join the unexplored territory with lots of earning opportunities.
Finally, that leads to the most valuable question: which carbon stocks have the best investment potential?
KRBN trades on the New York Exchange (NYSE) and is the most accessible ETF for investing in carbon markets. This ETF tracks the top traded carbon credit futures contracts and covers a wide range of cap-and-trade carbon allowances.
KraneShare's KRBN holds a mix of carbon allowance futures from every primary compliance market, including European Union Allowances (EUAs), Regional Greenhouse Gas Initiative allowances (RGGIs), California Cabron Allowances (CCAs), and U.K. Allowances (UKAs).
KRBN is a good investment opportunity for corporations, banks, and other financial institutions because investors' exposure to carbon prices doesn't require purchasing features, making it less risky. Also, it may be a solid choice for investors worried about the rising cost of carbon emissions on their portfolios.
Moreover, investors who held the largest carbon ETF for net assets in early 2021 saw their investments more than double by the end of 2022, the same as the price performance of European and Californian carbon allowances.
Carbon Streaming Corporation was a pioneering publicly-traded company that financed projects intended to achieve a net-zero future. Their carbon credits are listed on the Neo Stock Exchange in Canada (NETZ) and through OTC in the U.S. markets (OFSTF). It was the first carbon credit company to go public and the first streaming contract in the carbon credit space.
Carbon Streaming's main objective is to manage a diversified portfolio of investments in projects and companies actively involved with voluntary or compliant carbon credits. In addition, the company is working to help reduce pollution by securing funding for green projects, such as the Rimba Raya Biodiversity Project in Indonesia which could offset 130 million tonnes of CO2 in the next 30 years.
Carbon Streaming plans to create streaming deals with companies, governments, and individuals to purchase carbon credits from their assets. Also, the company intends to invest in projects in various world areas and projects, thus diversifying its exposure in the market.
Horizon's CARB is the first ETF in Canada to offer exposure to carbon credits only. It is a passive fund based on the carbon credit futures index and the first ETF in Canada to provide exposure to carbon credits through futures contracts or derivative instruments.
CARB holds only one of the significant types of carbon allowance futures, also the one that had the most success in 2021 - European Carbon Allowance (EUA). Therefore, the index is calculated based on the daily returns of the settlement carbon price of EUA (European Union Allowance) emission futures contracts.
CARB is listed on the Toronto Stock Exchange, with carbon credits to provide capital for carbon and greenhouse gas reduction projects. This ETF is an excellent opportunity for investors because they don't need to directly purchase futures to gain exposure to the carbon market.
This ETF allows for capital markets investment and has a daily settlement. Since it's held
in Horizon's corporate class ETF structure, it's anticipated that all returns from CARB will be taxed as capital gains instead of as income from derivatives.
CBON is Canada's first Canadian carbon credit mutual fund with an emerging asset class offering ETF series on the NEO Exchange. This ETF is similar to CARB in that it holds carbon allowance futures solely. In addition, however, CBON provides exposure to a combination of the three major carbon emissions trading markets: the European EUAs, the Californian CCAs, and the RGGIs of the northeastern U.S.
Ninepoint's fund focuses its investments on global carbon emissions allowance futures, focusing primarily on the clean energy economy. CBON covers 40% of the EU's total emissions, 75% of California/Quebec's total emissions, and 10% of Eastern US total emissions.
This exposure to the mix of the three major carbon emissions trading schemes reminds me a lot of the KRBN ETF carbon credit, the most accessible U.S. ETF for investing in carbon markets. However, CBON might be a perfect choice for Canadians searching for ETFs with a more balanced exposure.
Additionally, CBON has another listing, CBON.U. It's the same ETF, only trading under U.S. dollars, suitable for investors with savings held in USD since it reduces the currency risk when making an investment.
DutchGreen Business is a high-scale project developer specialized in generating carbon offsets from its nature-based, green solutions for nature conservation.
DGP Group is a public company offering exposure to carbon credits, trading on Euronext Amsterdam DGB Group. DGB is currently funding nine eco-projects with over 250,000 hectares of sourced land in ten different locations.
DGB provides actual investment returns for shareholders and offers a high social impact. For example, DGB generates income from carbon offsets with a bundle of nature-based projects such as preventing reforestation in Kenya, social projects in Uganda, or planting trees in Cameroon.
Moreover, there is substantial demand at premium prices for the carbon credits DGB expects to receive in 2022. In addition, the company plans to expand the project pipeline from 13 million offsets to at least 16 million tonnes of carbon offsets in 2022.
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