How to invest in North America's carbon markets

Carbon investors are increasingly looking at other compliance markets outside of the EU. The attraction for many is that as these markets are reformed then the price of emission allowances could stage a similar upward price trajectory as the EU experienced, particularly in the period since 2018 when the price of EUAs have risen 8-fold.

As I outlined in An asymmetric bet on a phase transition, compliance carbon markets typically go through a number of distinct phases in their development. Each phase sets the stage for the evolution of subsequent phases. There is a sweet spot in the development of an individual carbon market where the strength of policy support is such that the market has to dramatically revise its view on prices to reflect the potential improvement in the underlying fundamentals.

The key questions for carbon market investors looking to invest is how to identify when this switch is likely to occur, what factors should you be looking out for, and when are they likely to occur? North American carbon markets appear to be at an early stage in that phase transition.