SparkChange has cross-listed the first ETP providing physically-backed exposure to EU Allowances (EUAs), the world’s foremost carbon credit, on Deutsche Börse Xetra and Borsa Italiana.
Carbon credits represent a market-based approach to controlling pollution.
The SparkChange Physical Carbon EUA ETC debuted in November 2021, coming to market in partnership with European white-label ETF platform HANetf.
The ETP was originally listed on London Stock Exchange in US dollars (Ticker: CO2U LN), pound sterling (CO2P LN), and euros (CO2 LN). The new share classes on Xetra (FCO2 GY) and Borsa Italiana (CO2 IM) are also in euros.
The ETP comes with an expense ratio of 0.85% and currently houses $160 million in assets.
Each unit of the ETP is directly backed by allowances issued under the EU’s Emissions Trading Scheme (EU ETS).
Launched in 2008, the EU ETS is the largest carbon emissions trading system in the world and one of the EU’s principal tools to achieve decarbonization. The scheme covers more than 13,000 entities – including manufacturers, power stations, and airlines – collectively representing over 40% of the EU’s carbon dioxide equivalent (CO2e) emissions.
Often described as “permits to pollute”, each EUA entitles the holder to emit one tonne of CO2e. Polluters covered by the regime must obtain sufficient EUAs – which are sold via auctions or handed out to eligible entities for free – to cover their emissions or they become liable for significant fines. Polluters are thus given a choice: they can either reduce emissions or compete to buy more allowances.
To aid decarbonization and the transition to net-zero, the supply of allowances is subject to a cap which is reduced every year in order to drive down emissions. Fewer and fewer allowances mean that their scarcity value increases, driving up the carbon price, all else being equal. In turn, a rising carbon price incentivizes polluters to invest in emission-reduction technologies as they become more economical than buying carbon allowances.
EUAs held within the ETP cannot be used by polluters, ensuring direct and positive environmental impact – according to SparkChange, the ETP has withheld 1.5 million tonnes of CO2 permits in its first six months of trading.
Compared to existing EUA investment products, which gain their exposure through futures contracts, the ETP is able to avoid potential performance drag arising from rolling futures contracts in contango markets.
EUAs also have a low correlation with mainstream asset classes (0.10 with 10-year US Treasuries, 0.32 with the MSCI World, and 0.30 with the S&P GSCI), making them a useful portfolio diversification tool.
Elliot Waxman, CEO of SparkChange, commented: “Given the urgency surrounding the climate crisis and the demand we have seen for SparkChange CO2, we’re delighted to expand our product offering to Europe. The Emissions Trading System is the EU’s primary decarbonization tool and providing more investors with access to carbon allowances creates a greater environmental impact and helps mitigate the risk of carbon exposure. CO2 is, therefore, a vital ingredient in aiding the successful transition to a net-zero economy.”
Nik Bienkowski, co-CEO of HANetf, added: “We are delighted to be listing SparkChange Physical Carbon EUA ETC on Deutsche Börse and Borsa Italiana, and passporting across the other major EU markets. While investors are no doubt attracted to carbon allowances as an alternative asset class, the physical replication of the fund is also highly appealing to those looking to align their values and investment portfolios. Investors can either use the ETC to hedge the carbon impact of their investments or invest in CO2 as an alternative asset class.”