Global Carbon ETF (Synthetic)

Carbon futures are derivatives whose values are connected to carbon emissions allowances, such as the European Union’s Emissions Trading Scheme (ETS) or the Western Climate Initiative. These futures are deliverable, meaning that on expiry the holder takes ownership of the carbon allowances that their futures are connected to.

Carbon futures are traded on regulated exchanges, mostly by utilities companies and financial institutions. ETFs that hold these futures are required to sell their futures before expiry and buy new ones, in a process called “rolling”.

Carbon allowances exist as digital entries in government registers. They are illiquid and do not trade on exchange. Instead, they are traded in different places and different ways, often bilaterally between emitters. This can make them arguably less well-suited to investment by ETFs than futures contracts. ETFs need to hold liquid assets in order to ensure smooth and efficient trading and pricing.

Carbon allowances exhibit low correlations to traditional Australian investments like shares, bonds, commodities, cash and property. Reasons for these low correlations include:
• Non-economic players – like governments, which give allowances away for free – are major carbon market
• Carbon markets are more centrally controlled with more idiosyncratic regulations.
• Participants’ Carbon allowances have no cash flows, and therefore do not fit neatly into conventional valuation frameworks.

Global X is partnering with Carbon Neutral, a business specialising in reforestation, to plant and maintain trees in the Yarra Yarra biodiversity corridor in Western Australia. As part of this, Global X will contribute 10% of GCO2’s management fee each quarter to participate in Carbon Neutral’s Plant-a-Tree Program.

The Plant-a-Tree Program is a reforestation project helping to reconnect small patches of remnant vegetation to create a 200km green corridor and protect plant and animal life.

Global X will provide investors with a statement of the positive environmental impact management fee donations have provided at the end of each quarter. For more information please read out compliance policy located on the fund page.

GCO2 does not provide any carbon offset, nor does it invest in, hold or issue any carbon offsets. The fund invests exclusively in carbon allowances and specifically in futures contracts connected to them.

Investors should be sure to understand the differences between carbon offsets – of the kind issued by Australian government’s Clean Energy Regulator – on the one hand. And carbon allowances – of the kind found in the European Union’s Emissions Trading Scheme – on the other hand.

Carbon offsets are voluntary and mostly unregulated programmes. They allow business to theoretically offset their emissions and make “carbon neutral” products by doing things like renting forests. Carbon allowances by contrast are mandatory and highly regulated programs that require emitters to pay for their carbon dioxide emissions or face large fines.

GCO2 can be used to capture any potential rise in carbon prices. In order to incentivise an orderly transition to clean energy, global governments have steadily shrunk the supply of carbon allowances each year. This has helped send carbon prices higher over the past several years. However past performance does not guarantee future returns.

GCO2 can also be used as a portfolio diversifier, as carbon allowances exhibit low correlations with other asset classes and have nothing of their kind available in Australia.

Lastly, it can be used as an environmental allocation in a portfolio as carbon allowances are considered to be a practical instrument for curbing greenhouse gas emissions.

GCO2 invests in four carbon markets: the European Union ETS, the California-based Western Climate Initiative (WCI), the New York-headquartered Regional Greenhouse Gas Initiative (RGGI) and, the UK ETS.

The EU provides the largest carbon allowance market, constituting 50% of the fund’s weight at each rebalance. The EU’s carbon allowances are the major index component as its carbon market is the largest, most liquid, and most ambitious. All major emitters, including utilities companies, steel manufacturers, airlines and many more are required to participate.

RGGI is a cooperative effort among the northeastern US states of Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Pennsylvania, Rhode Island, Vermont, and Virgini. It is narrower than the EU ETS and only applies to powerplants above a certain size. The weights of RGGI futures are floored at 5% in the index.

The WCI includes California, and Washington state – but also the Canadian provinces of Quebec and Nova Scotia. It applies to oil refiners, power plant operators, and other large emitters.

The UK ETS is very similar in its design to the EU ETS. It applies to the power generation sector, aviation, and energy intensive industries.