CO2 emission contracts - How can you invest in them?

Environmental awareness and sensitivity to the impact our actions have on the climate is constantly increasing. The policy of the European Union in this area is also becoming increasingly stricter and more determined. Despite the crisis caused by the pandemic, the price of futures contracts for CO2 emission allowances is close to historical highs. Does it make sense to invest in CO2 emission contracts? And if so - what options do we have to choose from? We check.

Chart - Contracts for CO2 emissions

Chart of contracts for CO2 emissions (EMISS) 02.2012 - 10.2020, interval W1. Source: xNUMX XTB.

Kyoto Treaty

In 1997 in Kyoto, in Japan, a treaty prepared by the United Nations was negotiated, under which the signed countries undertook to reduce their greenhouse gas emissions by 2012, by at least 5,2% compared to 1990. In 2009, 183 countries agreed to abide by the provisions of the treaty.

Pursuant to the provisions of the treaty, an exchange market was created with greenhouse gas emission limits. Countries that have unused emission limits can sell them to countries that have already used up their emission limits.

European Emissions Trading System (EU ETS)

The European Emissions Trading System, or simply the ETS, is the world's first emissions trading system. Since 2017, only the Emissions Trading System in China is larger by volume.

The ETS system is based on national legislation resulting from European Union law. In the Energy and Climate Package adopted in 2008, European Union countries resolved that all companies in the energy-intensive industry and electricity generation are obliged to purchase CO2 emission allowances (EUA) on the ECX exchange.

The ETS consists of four stages. Stage III starts on January 1, 2013 and ends on December 31, 2020. Stage III introduced an annual emission reduction factor of 1,74%, which was to reduce carbon dioxide emissions by 20% by 2020.

From January 1, 2021, the fourth stage of the ETS will start and will last until December 31, 2028. According to the plan, the reduction factor will be increased to 2,2%, resulting in the planned reduction of CO2 emissions in 2021-2030 by 43% compared to 2005 emissions. In addition, the European Commission will have a reserve mechanism IAS, which will enable it to maintain the prices of emission contracts CO2 at a sufficiently high level by reducing the pool of allowances. Sufficiently high prices of CO2 emission allowances are to motivate energy producers to choose to burn natural gas instead of coal.

At the beginning of 2020, talks were held on increasing the reduction factor in the fourth stage of the ETS even to 3,7% (instead of the planned 2,2%), which would significantly increase the prices of contracts for exhaust emissions.

European Climate Exchange (ECX)

ECX for short, i.e. European Climate Exchange. The headquarters of the stock exchange is in London. Carbon futures are traded on the European Climate Exchange. The subject of trading are EUA futures, that is European Union Allowances futures and CER futures, or Certified Emissions Allowances futures.

The ECX exchange is traded by leading corporations such as Goldman Sachs, Morgan Stanley, Shell, E.ON etc. In 2010, the exchange was bought by Intercontinental Exchange (ICE).

Types of contracts for CO2 emission allowances

There are two types of CO2 emission allowance contracts and both are traded on exchanges. These are EUA futures and CER futures. One contract is for 1000 carbon dioxide emission allowances, which corresponds to 1000 tons of CO2 emission allowances. Contracts are priced in Euro.

EUA futures

Europan Union Allowances (EUA) are contracts for European emission allowances. Pursuant to European Union directives, all member states are allocated pools of CO2 emission allowances. If they use the allocated allowance pool, they can buy their emission rights from other members. EUA futures are financial instruments based on just unused emission rights.

CER futures

Certified Emission Reductions (CER) are emission reduction certificates. According to the adopted ETS system, units can receive exhaust gas reduction certificates in exchange for the implementation of projects under clean development mechanisms (CDM - Clean Development Mechanism). It is about implementing investments reducing greenhouse gas emissions, thanks to which the investing entity increases its own emission limit.

Top 5 CO2 emitters in the world

China

No one is surprised that China ranks first in carbon dioxide emissions in the world. The "factory of the world", as the saying goes, produces nearly 10 billion tons of this greenhouse gas annually. China owes most of its emissions to the burning of fossil fuels, mainly coal. 70% of the electricity consumed in China comes exclusively from burning coal.

United States

The world's largest economy and a mega-power, the United States is the second largest emitter of greenhouse gases, including carbon dioxide, into the atmosphere. The US emits approximately 5,3 billion tonnes of carbon dioxide annually. The main sources of this gas emissions come from energy production, transport and industry. The US economy relies heavily on transportation (raw materials, goods, and people).

Indie

India produces 2,5 billion tons of CO2 annually. India bases its electricity needs for 75% on hard coal. The growing urbanization and industrialization of this country generate an increasing demand for electricity. Due to the rich hard coal deposits and numerous coal mines, India's carbon footprint is likely to increase in the coming years.

Russia

Russia generates 1,7 billion tons of carbon dioxide every year. Russia has the largest gas deposits in the world. It is from burning natural gas and hard coal comes from the majority of the country's greenhouse gases.

Japan

Japan, as a highly industrialized country, generates 1,2 billion tons of CO2 into the Earth's atmosphere every year. Most of the emissions come from burning natural gas and hard coal to meet the electricity needs of the population and industry.

Trade in Polish limits on CO2 emissions

Poland produces approximately 330 million tons of carbon dioxide annually. Compared to 2000, we maintain a constant level of emissions and we are responsible for less than 1% of the world's emissions of this greenhouse gas to the atmosphere. This year, Poland sold on The European Emissions Exchange (EEX) over 85 million CO2 emission allowances, generating revenues of nearly EUR 2 billion.

How to invest in CO2 emission contracts

CFDs

Some brokers like XTB and Plus500 offer CFDs for CO2 emission allowances. These contracts are leveraged with a leverage of 1: 10 (10%).

Broker
End	Poland	Cyprus *
Symbol for CO2 emissions CFDs	EMISS	EUAs (ECF)
Min. Deposit	PLN 0 (recommended min. PLN 2000 or USD 500, EUR)	PLN 500
Min. Lot value	price * 5000 USD	-
Commission	-	-
Platform	xStation	Plus500 platform
	REVIEW	REVIEW
	CREATE AN ACCOUNT	CREATE AN ACCOUNT

* PLUS500 CY offer

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. From 72% to 89% of retail investor accounts record monetary losses as a result of trading CFDs. Think about whether you understand how CFDs work and whether you can afford the high risk of losing your money.

ETF Funds

[KRBN] KFA Global Carbon ETF

• • Issuer: CICC
  • Annual fees: 0.79%

The fund buys European Union Allowances (EUA), California Carbon Allowances (CCA) and the Regional Greenhouse Gas Initiative (RGGI). Instead, it provides exposure to the global, not only European, CO2 emission allowance market. The fund buys contracts that expire in December of the following year.

[GRN] iPath Series B Carbon ETN

• • Issuer: Barclays Capital Inc.
  • Annual fees: 0.75%

A fund that buys European contracts for CO2 emission allowances. Despite having assets denominated in euro, the value of the fund is calculated in US dollars. The fund has $ 5 million under management and the daily spreads are 0.64%.