The European Union Emissions Trading Scheme (EU ETS) is designed to drive price appreciation; European Union Allowance (EUA) prices have been rising since the inception of the scheme (+25% per annum over the past decade). As both a policy tool and a marketplace, its singular goal is massive decarbonization - those who emit carbon dioxide pay an accurate price for their emissions.
A structurally decreasing supply
The EU ETS market is designed to gradually reduce the number of allowances available over time, making EUAs increasingly scarce. As the supply decreases, the price of carbon allowances is designed to rise. This intends to encourage decarbonization by making it more expensive to emit carbon. As a result, industries are motivated to lower their carbon emissions and invest in more sustainable technologies.
Better Returns on Investment than other asset classes
Over the past decade, EUAs have delivered impressive returns. With an average annual return on investment (ROI) of 28%, EUAs have outperformed many traditional investment assets. For comparison, the S&P 500 has averaged an ROI of 10.8%, natural gas 5.8%, and U.S. Treasuries 3.1%. Among our set of comparables, only Bitcoin has outpaced EUAs with a staggering 67% annual ROI.
The unique nature of EUA returns
EUAs are unique financial instruments - their price is intentionally designed to rise. It is very unusual (or non-existent) for other asset classes to have a social or environmental purpose embedded in their price fluctuations. Instead, EUA prices are set to increase over time due to regulators' climate ambitions. As the price of EUAs goes up, companies face higher costs for their emissions, and there are more proceeds collected for public sustainable projects.
Positive returns as a fundamental asset characteristic
There may be periods of short- to medium-term price volatility or temporary declines in the EU ETS, often due to demand side events or temporary regulatory changes. Yet, it is widely agreed that EUA financial returns will keep being on the rise in the long run due to the factors mentioned above - intentionality, structural supply reduction and increasing climate ambition. The trend of price appreciation is yet to continue.
Opportunities for individual investors
Individual investors can engage in the EUA market, gaining not only financial returns (+25% price appreciation per year over the past decade) but also contributing to the broader goal of carbon reduction. By investing in EUAs, they add demand to the market, which can drive prices even further up over time. This combination of financial benefits and environmental impact makes EUAs an appealing investment option for those seeking to make a positive difference while earning solid returns.
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