Carbon, a chemical element with the atomic number 6 is an interesting investment topic and hence this post. Some people might feel like I am talking about chemistry rather than investing while others might think I am talking about the environment. The focus of this post is definitely investing and I will get into the details as you read further.
Gold, the shiny metal has been valuable for many years as a form of alternate investment. If you are one of those that live in developing nations, it is still regarded as a safer asset in many cases as compared to the local currency because it appreciates and can be used as a medium of exchange during times of inflation and in the longer run. A lot of people end up holding physical gold as an asset, although the market is quickly evolving into Exchange Traded Funds (ETF) and Gold Bonds.
When we think about assets, the more common ones would be gold, silver, platinum and may be diamonds. Who thinks about carbon? Absolutely true, but this is rapidly changing with more and more nations trying to reduce the overall carbon footprint, the most common form of it is reduction in carbon dioxide (CO2). There have been a number of global treaties amongst nations like the Paris Agreement, US Clean Air Act and United Nations' Kyoto Protocol that have pushed countries to think about their overall carbon usage. This is evident with the figure below on what has been the global carbon usage, a sad story but the true reality.
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| Source: ourworldindata.org/co2-emissions |
In order to reduce the overall footprint, countries have started creating carbon credits which are allowances allowing companies to keep a check on the amount of greenhouse gas emissions each year and then to reduce such emissions over time. Companies who do better at keeping tab of their emissions can go ahead and sell their accumulated credits to other companies. Governments across the world have supported such trading and that has allowed a new market to track the futures of carbon pricing. For the beginners, futures trading is about investing in the future price prediction of a commodity like gold, silver, oil and even the general market like S&P500.
Obviously, the futures trading is very risky and I do not recommend this for long term investors because predicting whether the price of something will go higher or lower is extremely hard because of the different market forces that may be involved. But as an asset diversification strategy, may be a small amount of investment could possibly be the right way to look at it. Carbon futures trading is more recent than gold but the way it has picked up is truly amazing.
Importantly, the data and view is relatively short term as compared to the price of gold, but given the stronger push towards carbon net neutrality makes me think bullish about this. At the same time, to reduce my risk with futures, I try to be short term and trade often if I see enough upside.
Here are some interesting yearly trends when I am looking at the SPDR Gold Trust ETF (GLD) and the KraneShares Global Carbon Strategy ETF (KRBN).
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| Source: finance.google.com - Comparison of GLD vs KRBN |
The value of global markets for carbon dioxide (CO2) permits grew by 164% to a record 760 billion euros ($851 billion) as per analysts at Refinitiv. Overall it is good in a way as it puts the onus back on the companies responsible for the spread of greenhouse gases. A great model to look at is the California Cap-and-Trade Program which acts as a supply and demand example. With time, the caps must reduce to thereby support reduction in these gases and hence the price will potentially go higher if companies don't change their operations fast enough to go carbon net neutral. The other upside is companies that can go carbon net neutral can then sell these credits to others in need.
Seeing an uptick of creation of ETFs to track carbon prices, I am relatively bullish about this sector for the short term to provide valuable returns and hence I am diversifying in this area. Given how quickly inflation has picked up in the recent year, I have not seen a lot of movement around gold which is surprising. But a strong reason for lack of movement in gold prices is because people are investing more money into cryptocurrencies as another alternate investment. Given the attraction of cryptocurrencies in the younger generation as compared to gold, it all makes sense.
Personally, I am not big on commodities because I don't feel it creates an overall value but compared to others like gold and silver, I feel reduction in carbon does. This is a highly debatable topic and there are obvious pros and cons which I don't plan to get into with this post. But as you all know I am always looking to diversify my wealth and get more value for my money, carbon investing seemed like an interesting opportunity to me.
(Disclosure: I own gold and carbon ETFs like GLDM and KRBN. Please review the Disclaimer section prior to any investments.)