Are high CO2 prices a goldmine for companies?

The prices of certificates for greenhouse gas emission rights have recently fallen slightly, but are still at historically high levels and are an important source of income for some businesses. Many new markets for trading these certificates are emerging, and emission prices are rising due to expectations of further cuts in emissions.

The world currently faces the challenge of achieving climate neutrality; a state in which the production of greenhouse gases will be as limited as possible. The emission of carbon dioxide, one of the most powerful greenhouse gases, will be compensated for by increasing its absorption from the atmosphere through various measures, for example, by planting trees. President Joe Biden has announced that greenhouse gas emissions in the US will be reduced by 50-52% by 2030. The European Union assumes that to achieve climate neutrality by 2050, greenhouse gas emissions must be reduced by 55% by 2030.

The tool used to achieve this is the EU ETS (Emissions Trading System) market. This is the largest market for emissions trading in the world, followed by China, and similar, but smaller exchanges also operate in Canada, California and New Zealand. Many countries are preparing their own emissions trading markets, while others have introduced an emissions tax in parallel or instead. These have already been introduced by 46 countries, covering 22% of global greenhouse gas production. The accumulated tax and carbon trading revenues globally now amount to approximately $45 billion, which is less than 1% of the earnings of all publicly listed companies worldwide. If, hypothetically, CO2 emissions worldwide were all taxed at the EU rate, the income accruing to governments would amount to $1.3 trillion, or 23% of the profits of publicly-listed companies worldwide.

In order to reach the EU’s climate target, member countries have imposed national limits on CO2 emissions and allocated allowances to individual companies. Companies can either use them and emit greenhouse gases into the atmosphere, or they can sell that allowance on the market to another entity for whom it is more profitable to buy than reform its production. This system increases economic efficiency by first reducing emissions where it is cheapest to do so. Since the start of 2018, the prices of EUA emission rights certificates have increased by 540% from EUR 8.10 to EUR 51.87 per metric tonne. The price has recently come off its record high on May 14, when it exceeded EUR 56 per ton. The price increases are the result of expectations of the introduction of ever more ambitious climate goals in the EU and around the world, reflecting the growing awareness of climate threats. In addition, alongside the increase in prices, the demand to invest in emission certificates has also increased as the market has attracted investor attention.

Many companies choose to sell their emission rights, raising significant additional income. In Q1 of this year, Tesla, the electric car manufacturer, sold a single block of emission certificates worth a record $518 million, and $1.58 trillion-worth in 2020. The probable buyer was Sellantis, a consortium created from the merger of Fiat Chrysler and PSA, the maker of Peugeot and Citroën vehicles. Tesla sells its emissions under a dividing system in California and other states in the US, by which car manufacturers must reduce the emissions of cars sold. Instead of limiting the emission of its own cars, Stellantis decided to use the rights acquired from Tesla in the US. However, this policy is changing and it is very likely that, in the coming years, it will reduce or abandon the purchase of these rights in favour of producing its own products in a greener manner. In 1Q2021, revenues from the sale of emission rights accounted for as much as 25% of Tesla’s revenues, which makes it heavily dependent on this source of income. Investing in this company is therefore strongly linked to the price of emissions certificates.

In China, Volkswagen bought Tesla’s emission rights for its local subsidiary. According to Chinese regulations, car sellers have to limit the emissions of the models they sell. Volkswagen still mostly sells cars powered by internal combustion engines. This solution generates additional income for Chinese zero-emission car manufacturers such as Nio, BYD, Xpeng and Li auto; and also indirectly for battery manufacturers such as CATL, LG Chem or Panasonic.

The costs and revenues related to emission rights will become increasingly important items on the balance sheets of many companies in the coming years. Emissions trading and taxation systems will cover a greater range of global emission producers. The ever more ambitious goals for reducing emissions will be reflected in the price of these certificates. Currently, emissions on the European market are the most expensive in the world, and a price correction cannot be ruled out in the short term. However, in the long term, there is potential for significant price growth. Remember, however, that prices cannot increase indefinitely, because at some point it will be more profitable to limit emissions than to buy the right to emit them.

CopyPortfolios is a portfolio management product, provided by eToro Europe Ltd., which is authorised and regulated by the Cyprus Securities and Exchange Commission.

CopyPortfolios should not be considered as exchange-traded funds, nor as hedge funds.

Cryptoasset investing is unregulated in some EU countries and the UK. No consumer protection. Your capital is at risk.

CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 67% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.