The race is on to launch Canada’s first carbon credit exchange traded fund — a way for investors to bet that industry will need time to transition away from fossil fuels, and that the value of carbon emission credits will grow.
Toronto-based Ninepoint Partners LP, an investment manager with about $8 billion under management and best-known for its bullish position on oil and gas, filed a final prospectus on Monday that outlines the details of its carbon credit ETF, which will be a series within a mutual fund, tentatively set to launch Feb. 16 on the Neo Exchange.
Shortly thereafter, Toronto-based Horizons ETFs filed a prospectus outlining its plans to launch a carbon credit ETF, set to begin trading on Thursday, February 10 on the TSX exchange.
The trade in carbon credits has rapidly grown into an estimated US$270 billion market over the past 15 years, and continues to grow as countries around the world devise regulatory regimes that limit carbon emissions.
The carbon credit ETF adds further clarity to how Ninepoint views the energy transition: Its fund managers have been vocal about their beliefs that demand for fossil fuels such as oil will continue to increase for years, in concert with global population growth, and because it will take time to establish the infrastructure and supply chains to supply alternative energy sources. But its launch of the carbon credit ETF shows that its managers also recognize that carbon emission regulations will make fossil fuels increasingly more expensive.
“We have to force people to transfer to a less carbon-intensive future, and carbon credits are the tool that’s being used around the planet to do that,” John Wilson, co-chief executive officer and managing partner of Ninepoint, told the Financial Post.
Today, carbon trading systems exist in 38 countries, including an international system in Quebec and California. In general these systems place a cap on overall emissions, and at the end of a specified period of time, major emitters must produce enough carbon credits to account for their share of emissions, or else face fines and penalties.
A single credit generally allows for the emission of one tonne of carbon dioxide equivalent — roughly what is emitted by driving from Vancouver to Toronto, according to Ninepoint. Depending on the regulatory regime, credits are purchased at auctions, obtained via trade or obtained for free at the start of compliance periods.
Carbon credit ETFs have been launched in the U.S. but not yet in Canada. Ninepoint plans to purchase future contracts, or options that give investors exposure to the changes in price of a carbon credit.
Wilson said that Ninepoint’s ETF will initially use investor funds to purchase future contracts on carbon credits in the three most liquid emissions trading systems, based in the European Union, the shared Quebec and California market, and the collaboration between 11 U.S. states in the Northeast that’s known as the Regional Greenhouse Gas Initiative.
Together, those markets cover nine per cent of global gas emissions, according to a white paper produced by Ninepoint.
Ninepoint’s ETF will allocate its investor funds equally among the three markets, and rebalance at the end of every month. Ninepoint plans to allocate funds to purchase futures on carbon credits in other markets as they emerge and grow in size. The management fee will be set at 0.8 per cent, plus other custodial fees, Wilson said.
In contrast, Horizons’ carbon credit ETF plans to only purchase carbon credit futures that track the European Union system, though it could add other markets in the future. It will rebalance once a year with a management fee set at .75 per cent.
The global value of carbon credits — meaning not the derivative future contracts that the ETF purchase — grew 20 per cent in 2020, the fourth consecutive year of growth, according to the consulting firm McKinsey & Company.
In an 84-page report published last October, it noted that so far institutional investors have largely stayed away from carbon credit markets, but that could change as the trade of carbon credit trading markets grows more liquid and provides the possibility of attractive returns.
“Carbon markets are rapidly approaching critical mass from an institutional investor’s perspective,” the McKinsey report notes.
At the moment, the EU trading system is by far the largest, accounting for roughly 90 per cent of global value, and about 80 per cent of the 10.3 billion allowances that were traded around the world, according to the financial analysis company Refinitiv.
Even in 2020, when emissions in the EU dropped by an estimated 14 per cent, trading in carbon credits increased by 20 per cent, according to Refinitiv.
The growth comes not only as various governments institute mandatory regimes to cap emissions, but also as corporations and organizations purchase carbon credits to offset their own emissions.
Wilson said carbon credits are not correlated to other assets and allow investors to diversify their portfolio. He added that Ninepoint expects each of its funds to reach $1 billion in size, though he acknowledged it would take time for its carbon credit ETF to reach that size.
“It’s barely started growing,” said Wilson, about carbon credit trading markets. “I don’t think we’re even through the first inning and people are getting more serious about it because the consequences of not taking action [on climate change] are just ratcheting up.”
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