Carbon Credit: A Booming Market for ETF Investors?

What is a carbon credit?

Carbon credits are permits given out by the government to allow an owner to create only a certain amount of carbon dioxide emissions, or other greenhouse gasses. Therefore, companies can only pollute up to a certain limit, and those credits are meant to be reduced over time.

If the company doesn’t meet its credits, it can then sell those credits to another company. Therefore, these private companies are incentivized to bring in extra cash from extra credits.

Countries around the world continue to sign on to bringing down emissions to net zero by 2050. To do this, the carbon credit system will play a major role in bringing private companies on board. So with that in mind, how can Canadian ETF investors access this potential opportunity?

Four carbon credit ETFs recently launched

Four new ETFs launched on the Canadian market recently to gain exposure to the carbon credit market. Those funds are Horizons Carbon Credit (CARB), Ninepoint Partners’ Carbon Credit (CBON) along with a United States version, and the TD Global Carbon Credit Index (TCBN).

Each of these ETFs provides exposure to the carbon credit industry through futures contracts. The exposure is also worldwide, spanning from Europe to the U.S., though of course only limited to these carbon credit systems in place by the government.

The system continues to expand in recent years with net-zero targets becoming a major focus. Therefore, in the near term it looks like the carbon credit system will certainly be a place for at least a macro view.

Investing in ETFs can therefore allow investors to gain exposure to this rapidly expanding opportunity in a safer way. However, the road there could be windy, and it may not be a solid long-term hold.

Carbon credit ETFs were not so great in the past

If investors look at past carbon credit ETFs, the last decade hasn’t been great. Barclays iPath Series B Carbon (GRN) for one only took off once President Joe Biden came into office, but quickly fell back as with other renewable energy stocks. Before that, it traded under iPath Global Carbon ETN, where shares continued trading down until they shifted in 2018.

From there, Russian sanctions after the invasion of Ukraine have led to countries using excess credits to fund a shift away from oil and gas altogether. This could even prove worse for the environment, some analysts suggest, as instead of seeking renewable sources they may move backward to coal.

It goes to show that there are still risks associated with the carbon credit market, even in ETFs. Politics has a lot to do with the move to clean energy, but governments will need private companies to be on board with that move. While the carbon credit is one way to do that, it will take countries and companies working together to find programs that benefit them both.

So should you invest in carbon credit ETFs?

While unsatisfying, it’s unclear whether there’s a major opportunity with carbon credit programs or not. And the ETFs recently released aren’t a great indicator of growth in the long term, certainly.

However, for those that believe the carbon credit program is the best way forward, any major growth is likely in the next few years. That being said, it’s unlikely that this is going to be a program we use 20 years from now. So investors may want to go over their ETF portfolio every so often to see if it’s still the opportunity they hoped it would be.

And as always, make sure to meet with a financial advisor if you’re looking to go down this road. You’ll likely want to find other ETFs that could help offset your goals.