HANetf and SparkChange have launched the world’s first exchange-traded product (ETP) backed by physical EU carbon allowances (EUAs).
The ETP started trading on the London Stock Exchange on Thursday.
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EUAs, also called “permits to pollute”, are allowances that the EU Commission forces industrial emitters to obtain to cap the level of pollution in Europe.
As polluters and investors compete for a supply of EUAs, investors will be able to reduce the amount of EUAs in the marketplace available to polluters.
This is likely to have the effect of increasing scarcity and upward price pressure until they are too expensive for polluters, incentivising the polluters to switch away from using dirty fossil fuels to cleaner energy.
The EU Commission automatically reduces the issue of future allowances each year in order to decrease emissions over time, with the potential to create upward price pressure and drive scarcity value.
Under EU law, holding EUAs for 12 months triggers additional permits being cancelled in future years adding to further scarcity and removing EUAs from polluters.
EUAs valuations have risen more than 192% in the last 3 years on the back of market reforms and are one of the top performing commodities of recent years.
SparkChange Physical Carbon EUA ETC (LSE:CO2) is backed by physical allowances and thus tracks the price of EUAs, excluding fees.
Nik Bienkowski, co-chief executive at HANetf, said that the ETP is a “ground breaking way” for investors to tap into the decarbonisation market and “help revolutionise the way asset managers meet their net zero goals”.
“The SparkChange Physical Carbon EUA ETC has been designed to overcome the issues of investing in the physical carbon allowance market such as the complexity of opening an EUA registry account, and the contango costs of carbon futures – as a result, SparkChange CO2 has shown to outperform investments in carbon using futures,” he said.
“SparkChange C02 is the world’s first exchange traded product backed by physical EU carbon allowances (EUAs) and makes it easier to access the potential returns and properties of owning physical EUA. SparkChange C02 will complement HANetf’s growing offering of ESG and low carbon strategies.”