It’s unclear whether investing in mandatory reduction-driven ETFs is a good investment. Speculation by outside investors could negatively affect the original goal of the ETS-to reduce pollution-by influencing the futures’ price to reflect speculative decisions instead of marketplace decisions.Ĭonversely, outside investors create liquidity in the market, potentially making the price more accurate-instead of allowing only the EU to influence the price through its supply. The existence of the EUA futures market has led to some controversy. The futures contract for EU ETS is known as the European Union Allowances or EUA. The interesting part is that anyone-individuals, investors, companies, hedge funds-can invest in this carbon futures market by investing in ETFs that purchase the futures contracts. Price too low? The marketplace simply reduces the number of given credits. Well, the supply of these allowances is controlled by the EU ETS marketplace, which means the price is directly influenced by it. Which makes for an interesting investment market. These futures contracts are what ETFs, like the Kraneshares Global Carbon ETF (KRBN). Companies can enter into a contract with each other to sell and buy carbon credits at a later date. Because one company reduced more than necessary-another company can purchase the “difference” to cover their inability to meet the current standard.įutures contracts are created with these allowances-or credits-as well. There are two options for companies: reduce their emissions on their own or buy carbon credits.Ĭarbon credits are allowances that can be purchased from companies that went over and above in their emission reduction. Those that exceed their allowed usage are fined. As emission usage lessens, the EU moves the cap down. The EU sets a “cap” on the amount of emissions (pollution) that the industrial sector can emit. A large goal! The EU ETS (established in 2005) sparked others to establish similar systems-including regional reductions in New England and California.īut how do these emission trading systems work? It’s called the cap and trade principle. Their target is to reduce greenhouse gas emissions to at least 55.0% below the 1990 levels by 2030. The first ETS grew out of the European Union’s need to reverse pollution. The Cap and Trade Emission Trading Systems Failure to achieve pledges is atoned for by purchasing carbon credits.
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