A “hysterical pseudo religion”

A “hysterical pseudo religion”.

That’s what Democratic Unionist Party MP Sammy Wilson has to say about climate change.

It’s a contentious issue, and something this heatwave has had me thinking about recently. Right now London does, literally, seem to be “warming”.

And of course, let’s not forget the infamous president of the United States, dear Donald. According to him, “Climate change is a big scam for a lot of people to make a lot of money”… presumably followed by the word “bigly”…

The British people’s feelings towards the Donald, at least, appears to be universal, as the London blimp revealed last month.

But however you feel about climate change itself, measures being taken by the EU to tackle emissions have opened up a serious investment opportunity.

Thirteen years ago, European Union policymakers did something quite unusual.

They created a commodity market, purely out of law, based around an artificial commodity. Something called carbon “allowances”.

Permits for pollution, basically. Businesses affected by this law must own the corresponding number of “allowances” to the amount of carbon they’re releasing into the atmosphere. Anybody who doesn’t faces a hefty fine.

The whole system functions via the EU carbon market, which allows companies to buy and sell their allowances.

All well and good James, but where’s the investment opportunity?

I’m getting to that.

Things didn’t start well for the EU carbon market.

It had barely got going before the financial crisis hit. Industrial production plummeted – and with it the demand for carbon allowances.

Prices crashed, and the market seemed finished.

A bit embarrassing, really.

Since then, the EU has been trying to claw back the excess “allowances” out there. Shrinking supply in order to create a viable, competitive market.

Things started to look up around 14 months ago.

In fact, since then the market has taken off – prices more than tripling.

But the real opportunity? I think that’s what comes next, for two reasons:

  1. The EU government cuts the number of “allowances” on sale in August in half – that has led to prices rising every August in the history of the market. That could be about to happen again, starting as soon as tomorrow.
  2. Long term – there’s a new EU law which will cut down supply of these allowances, even further. Smaller supply = bigger prices. I’d expect a flood of buyers in anticipation of this law, too. That comes into effect in January.

German bank Berenberg is pegging the 2020 price for these carbon allowances at around five times what they are today.

Extraordinary growth in a relatively short time frame.

A turn around, indeed.

Until next time,

James Allen
Editor, Exponential Energy Fortunes

Category: Energy

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