Carbon Emission Allowance ETF Products Decline... Experts Recommend "Increasing Allocation"

Global Carbon Neutrality Trend Continues... "Buying Opportunity at Low Prices"

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[Asia Economy Reporter Myunghwan Lee] Exchange-traded fund (ETF) products based on carbon emission allowances are experiencing significant declines. This is attributed to the impact of soaring natural gas prices following the Russia-Ukraine war, which has led to a downward trend in carbon emission allowance prices. However, the securities industry recommends increasing holdings during price adjustments, considering the global continuation of carbon neutrality policies.

According to the Korea Exchange on the 21st, among all ETFs listed on the domestic stock market over the past month (August 19 to September 20), those tracking the European carbon emission allowance futures index showed the largest price declines. The price drops for these products reached -26.08% for ‘SOL European Carbon Emission Allowance Futures S&P (H)’ and -25.18% for ‘KODEX European Carbon Emission Allowance Futures ICE (H)’, ranking first and second in ETF price declines, respectively. Similarly, ETFs following the carbon emission allowance futures index, such as ‘SOL Global Carbon Emission Allowance Futures IHS (Synthetic)’, also recorded price drops exceeding 16%.

The decline in carbon emission allowance ETFs appears to be influenced by the rise in global natural gas prices. The sharp increase in natural gas prices has raised concerns that energy consumption will decrease accordingly, which has negatively affected carbon emission allowance prices. The October natural gas futures price on the New York Mercantile Exchange traded at $7.73 per MMBtu (British thermal unit). Although this is lower than the mid-$9 range at the end of last month, it is nearly double the approximately $4 level seen at the beginning of this year before the war began.

As natural gas prices rose, carbon emission allowance prices fell. The December carbon emission allowance futures price traded on the London ICE Futures Exchange dropped from a peak of €96.9 per ton in February to €66.2 in September, marking a 31.6% decline over seven months.

However, the securities industry advises that if prices adjust somewhat, it may be worthwhile to increase the proportion of carbon emission allowance ETFs. Despite the war’s impact, the carbon emission allowance market is expanding, and prices are expected to show an upward trend in the long term. Hyungdo Ham, a researcher at Shinhan Financial Investment, advised, "Considering that countries’ carbon neutrality policies continue and that the carbon emission allowance market accounts for only 23% of global emissions, we recommend increasing holdings around the €60 level."

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