Buy and hold going physical

Up until recently, an investor wishing to gain exposure to the EU carbon market had to invest in an exchange traded futures product. That changed in November last year when the first physical carbon allowance investment product launched.

Unlike futures based products, investing in the physical allowance is not without controversy.

In one of the very first articles for Carbon Risk I highlighted the potential impact that a physical buy-and-hold EUA investment funds could have. In Investors have a new way to help the environment I outlined that unlike an investment in a futures based fund, purchasing the underlying physical allowances also contributes to the relative scarcity of EUAs:

By buying the carbon fund investors are withdrawing carbon allowances from the market, reducing the supply available to obligated polluters. This should then help to drive up the cost of the remaining allowances, helping to stop emissions from occurring in the first place and incentivising the investment in new technology. Meanwhile, a physical carbon contract eliminates the basis risk from futures contract rollovers.

The fund in question, the SparkChange Physical Carbon EUA ETC (CO2), launched on the London Stock Exchange on Thursday 4th November. News on the fund’s progress has been relatively quiet in the meantime, at least compared with the KraneShares Global Carbon Allowance ETF (KRBN) which has captured the attention of carbon investors.

This week Europe’s independent authority tasked with promoting stable financial conditions published its final report on the EU ETS. It concludes that there are "no major deficiencies" in the role speculation plays in the EU carbon market. The report is a treasure trove of information on the EU ETS that you is very difficult to piece together alone. Included in the report is a section on the role that buy and hold physical investment products are having.