As we know from multiple studies, the carbon price needed to stimulate enough physical carbon emissions reductions to meet the Paris Agreement objectives is in the range of $60 to $100 per tonne or higher by the year 2030. As extreme weather events become more common and society at large becomes more aware of climate change and its impacts, we believe that this will produce even stronger policy responses from governments, resulting in further reductions in emission caps which may provide support for a strong and rising carbon price. The following graph indicates the annualised return generated from an investment in carbon allowances today for various carbon allowances prices at the end of 2013. The calculations assume a price today of $20 per tonne.
Carbon Cap has collected and cleaned historical carbon price data on multiple ETS markets and has analysed the data to calculate the long-run return (risk premium) generated in each market and for a portfolio that allocates capital across markets (Composite Portfolio). The composite portfolio has generated attractive annual returns along with low correlations to traditional asset classes (see performance table below).
Although all carbon markets are based on a single tonne of CO2, due to a variety of factors, the correlation between markets is very low, providing a large benefit to diversifying across markets. In addition, while carbon markets do exhibit some sensitivity to global economic growth, they also have long periods where they are not correlated to traditional asset classes such as equities and bonds, thereby providing diversification benefits to investors with traditional equity/bond portfolios.
Carbon Cap and our partner, Apollo Multi Asset Management, will shortly launch a “World Carbon Fund” which will invest in compliance carbon markets around the world. Carbon Cap has signed an investment advisory agreement with Apollo Multi Asset Management LLP (Apollo) whereby Carbon Cap will provide research and advisory services to Apollo who will manage the fund.
An added benefit for investors in the fund is the “green impact” of their investment since the act of buying and holding carbon allowances from compliance markets will reduce the supply of carbon allowances, effectively “tightening the cap” and placing upward price pressure on the price of CO2. Since a higher carbon price has a direct impact on CO2 physical abatement decisions by emitters, a higher price can be interpreted as directly correlated with less emissions.
In summary, the World Carbon Fund will allow investors to invest in global carbon markets with the potential to generate substantial returns from an alternative asset class with a low correlation to traditional asset classes. There may also be an added benefit of actual physical abatement activity as the price of carbon rises but this relationship is tenuous and difficult to assess.
Please check the website again in the near future for more information on the fund launch and sign up for our newsletter to receive updates on the fund launch.