American investors are joining a rush to buy carbon permits, prompting bets that the cost of pollution may be about to rally further after European prices hit a record high. Total assets of the KFA Global Carbon ETF, the biggest exchange-traded fund listed in the U.S. that tracks carbon markets, have surged to almost $60 million from just $3 million six months ago. Most of the increase has come since U.S. President Joe Biden signaled after his January inauguration that climate change would be a key policy focus.
The fund’s growth is the first hard evidence that U.S. institutional investors are taking interest in a market that used to be the realm of a few hedge funds and the companies required to buy pollution permits. The involvement of big money is showing up in EU carbon prices, which have rallied more than 30% this year to break through $50 for the first time.
“From investors’ perspectives, climate and carbon are rising to the top,” said Eron Bloomgarden, founder and partner at Climate Finance Partners, one of the advisers to the ETF. “The Biden administration coming in the U.S. and signaling that climate is on top of the agenda, that’s been quite helpful.”
Carbon for Everyone
Money has poured into an ETF that invests in carbon markets globally
Source: Bloomberg
Generally, the higher the carbon price goes, the more expensive it becomes for companies to burn fossil fuels. That helps create a financial incentive to switch to technologies that cut emissions.
But there’s also a risk that if the price rises too far, too fast, companies will buckle under the cost before they’re able to invest in equipment that emits less CO2 into the atmosphere. More than 11,000 power and industrial companies in the EU are required to buy permits to account for their emissions.
About two-thirds of the KFA Global Carbon ETF is invested in futures for carbon contracts in the European Union’s emissions trading system, the world’s largest carbon market. The fund also invests in the U.S. carbon market, which is still fragmented.