As a clean energy future becomes more urgent, polluting organisations across the globe increasingly use carbon credits to appease investors, consumers and governments. This allows them to compensate for their environmental impact by financing CO2 capture and mitigation.
One carbon credit will usually equal one tonne of CO2 removed or offset by a verified producer, using a certified method like tree planting or farming that consumes CO2.
Refinitiv estimated that US$851b in carbon credits were traded globally in 2021 – up 164% year-on-year. Over the last five years, the EU’s carbon credit price has increased over 1,300%. But it doesn’t just shoot up: the price crashed 39% at the beginning of the Russia-Ukraine war. It has since rebounded and is up 43% year-to-date (as of 28/08/2022).
While carbon credit markets are geared towards organisations, investors can now participate through Exchange Traded Funds (ETFs) – the most direct method of investing in this growing asset class.
A fund like KraneShares Global Carbon Strategy ETF (NYSE: KRBN) tracks a popular index like the IHS Markit Global Carbon Index through investing in futures.
Australian investors will have to wait a little longer for an ASX-listed carbon credit ETF: VanEck Global Carbon Credits ETF (ASX: XCO2) is expected to list on an undisclosed date this year. It’ll track the ICE Global Carbon Futures Index, and will be available on Stake.
While the world figures out how to power the fourth industrial revolution, there’s a lot of uncertainty. But carbon credits appear to be here to stay, which could present opportunities for investors.