A 3-Pronged Approach to Low Carbon: How Carbon Markets Aid the Transition to Net Zero

Oct 3, 2022

Carbon allowances, which are issued within Compliance carbon markets, are designed to reduce emissions via the help of market forces.

Often erroneously labelled as carbon credits, carbon allowances create a “climate divided” by creating annual emission reductions. Thus, unlike offsets, they do not have to be retired to create environmental impact, making them an investment instead of a cost.

EU Carbon Allowances (EUAs) and California Carbon Allowances (CCAs) are uncorrelated assets with a strong returns profile, and are investable through a range of Exchange-Traded Products.

Allowances can also be used to hedge the carbon price exposure inherent within today’s portfolios.

The challenges faced by today’s investors

Investors seeking to transition their portfolios to Net Zero are faced with three key challenges:

  • They must align their investment activities with the Net Zero transition, per the demands of voter constituents and the general public
  • They must monitor and manage risks associated with the transition in accordance with regulation and a burgeoning fiduciary responsibility
  • They must identify outperforming investment opportunities during the transition

This paper explores how investing in carbon allowances can serve as a tool to meet these challenges.

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