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The Carbon Fund – An Alternative Investment

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The Carbon Fund invests in both domestic and international carbon credits, which may be a suitable defensive investment for your investment portfolio.

Carbon credits are best described as an alternative asset, which means they’re unlike bonds and equities, and their return is largely uncorrelated to these asset classes. The main benefit from including alternative assets in portfolios relates to the fact that their returns are not positively correlated to a material degree to traditional asset classes, so they offer valuable diversification benefits for portfolios. The Carbon Fund has a market capitalisation of $62m, and trades on the NZX under the ticker code CO2.NZ. As at the end of September, 94% of the fund is made up of NZ Carbon Units (NZCUs), 3% Australian Carbon Units (ACCUs) and 3% cash to fund purchases.

The New Zealand Emissions Trading Scheme (ETS) was introduced by the Labour government in late 2008 as New Zealand’s primary mechanism for dealing with climate change. Whilst it was amended and changed by the incoming National government when they subsequently took office shortly thereafter – the mechanism remained and was re-launched in July 2010.

The NZ ETS was operated under the Kyoto Protocol, this was then superseded by the Paris Agreement. New Zealand signed the Paris Agreement in 2015 which relates to keeping worldwide temperatures from rising more than 2 degrees relative to preindustrial levels. The major requirement of the agreement is for countries to commit to Nationally Determined Contributions (NDCs) and report progress every 5 years. New Zealand’s NDC involves a commitment to reduce emissions 30% below 2005 levels by 2030. The New Zealand Government controls the allocation of Carbon Credits via a quarterly auction system with a limited number of credits available, and in doing so, it acts as mechanism for incentivising businesses that are significant carbon emitters to consider cleaner alternatives.

The investment thesis behind NZ Carbon Credits relates to benefiting from the Government’s push for a material reduction in carbon emissions to meet our legal obligations under the Paris Agreement. The NZ government conducts 4 auctions for carbon credits per year, where companies deemed emitters by the government bid for credits to offset their carbon emissions. It’s essentially a tax on companies that are significant carbon emitters.

There is also a secondary market for carbon credits, which enables holders and emitters to buy and sell credits throughout the year. The first auction of 2021 was held in March where the clearing price was $36, in June the clearing price was $41.70, and the September auction cleared at $53.85 per unit. The government has a Cost Containment Reserve (CCR) of up to 7m NZ Carbon Units they can release to the public via the ETS auctions each year. The government will only release additional units when the clearing price of an auction clears an agreed trigger price, for 2021 this was $50. The full balance of 7m units from the CCR have been exhausted for 2021. The government has set the trigger price at $70 for 2022, increasing it by 12% p.a to $110.15 in 2026. The Climate Change Commission estimate that based on marginal abatement costs, emissions pricing would need to reach $140 per unit by 2030 to achieve the NZ 2050 carbon goals.

The Carbon Fund, managed by Salt Funds Management provides retail investors the opportunity to benefit from the global push for clean low carbon alternatives via carbon credits, without the risks of owning forestry.

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