Financials will support carbon prices

Rising prices have led to an influx of retail speculators to the carbon market. The total assets invested in exchange-traded carbon products rose to a record high of almost $3 billion in February, before sliding downwards after the onset of the war in Ukraine. Still, the total net asset value of exchange-traded carbon products has recovered, reaching nearly $350 million in August, up from around $56 million a year earlier.
We expect financial intermediaries to provide price support for global carbon markets in 2022-23. Financials have been attracted to carbon as an asset class because of the strong returns. Carbon allowances have outperformed the S&P 500 and US ESG mutual funds over the last 12 months and past three years.

EU carbon has been the best performer over the last three years, while the Regional Greenhouse Gas Initiative (RGGI) price has provided the best return in the last year. Underlying market tightness has boosted demand for these markets.
Carbon markets give investors access to a tool that tracks the energy transition with a diversified approach. The carbon price generally tracks the costs of the most competitive low-carbon technology with an upside of future scarcity. Meanwhile, it allows investors to hedge their carbon exposure elsewhere in their portfolio. The risk-profile is also limited as carbon is fundamentally a climate tool for regulators.