The EU Emissions Trading System (ETS) has become the world’s largest and most liquid carbon market. With carbon prices hitting record highs in early 2022, many investors are starting to pay attention to the ETS as an investment opportunity. An effective Ets investment strategy should take into account both market price trends and policy signals from the EU.
Analyze historical price trends and volatility of EU carbon allowances
EU Allowance (EUA) prices experienced high volatility in the past, with a price crash in 2012-2018 due to oversupply. However, after the EU Commission intervened to limit supply in 2019, prices recovered rapidly. The latest 2022 price spike also shows the market’s bullish outlook. Investors should analyze historical price charts, volatility, trading volumes, and market participant composition when devising an Ets investment strategy.
Understand EU climate targets and emissions cap trajectory
The EU has legislated targets to cut emissions by 55% by 2030 compared to 1990 levels. This will require lower emissions caps under the ETS, leading to higher EUA prices over the long term as supply tightens. Investors need to analyze the emissions cap trajectory and model different price scenarios based on EU climate ambitions when developing an Ets investment strategy.
Utilize carbon futures, options and carbon-related equities
Investors can gain exposure to the EU carbon market through EUA futures contracts and options. There are also publicly-listed companies with carbon-intensive operations whose stock prices are affected by EUA prices. Constructing a diversified portfolio using such carbon-related equities and derivatives contracts allows investors to implement sophisticated Ets investment strategies.
Stay updated on ETS market reforms and expanding carbon pricing
The EU is planning to expand carbon pricing to more sectors and implement carbon border adjustment taxes. This will raise demand for EU carbon allowances. Additionally, there are proposals to limit financial speculators’ participation and cancel certain allowances. Investors have to closely track ETS reforms and consider their impacts when making investment decisions.
An optimal Ets investment strategy has to incorporate both carbon market price signals and the policy landscape. Investors should analyze EUA price charts, EU climate targets, market expansion plans and potential reforms when devising their strategies.