DWS launches European carbon credit ETP

Dec 4th, 2023 | By | Category: Commodities

DWS has launched a new ETP in Europe providing physically backed exposure to EU Allowances (EUAs), the world’s foremost carbon credit.

DWS launches EU carbon credit ETP

Carbon credits represent a market-based approach to controlling pollution.

The Xtrackers Physical Carbon EUA ETC Security (XEAL GY) has been listed on Deutsche Börse Xetra with an expense ratio of 0.79%.

Each unit of the ETP is directly backed by allowances issued under the EU’s Emissions Trading Scheme (EU ETS).

Established in 2008, the EU ETS stands as the world’s largest carbon emissions trading system and is a pivotal instrument in the European Union’s pursuit of decarbonization. It encompasses a vast array of entities, including manufacturers, power stations, and airlines, collectively responsible for more than 40% of the EU’s carbon dioxide equivalent (CO2e) emissions.

Often characterized as “permits to pollute,” each EU Allowance (EUA) grants its holder the right to emit one tonne of CO2e. Entities subject to the EU ETS must secure an adequate number of EUAs, either through auctions or allocations, to cover their emissions; failure to do so results in substantial fines. This regulatory framework compels polluters to make a choice: either reduce emissions or engage in a competitive market to procure additional allowances.

The EU ETS employs a gradual reduction of allowances over time, rendering it a potent policy instrument for attaining ambitious climate objectives, such as those delineated in the Paris Agreement.

For investors, beyond providing exposure to the evolving energy transition sector, carbon credits have historically demonstrated a low correlation with traditional asset classes like equities and fixed income, offering the potential to bolster portfolio diversification.

XEAL represents the second physically backed carbon credit ETP in Europe following the November 2021 launch of the SparkChange Physical Carbon EUA ETC (CO2 LN). CO2, which also invests directly in allowances issued under the EU ETS, currently houses €70 million in assets and has an expense ratio of 0.89%.

The WisdomTree Carbon ETC (CARB LN), meanwhile, offers indirect exposure to EU Allowances by way of futures contracts. It has $250m in AUM and comes with a management expense ratio of 0.35% and a swap fee of 0.45%.

Investors should note that futures-based carbon credit ETPs may entail specific drawbacks, however. Notably, in times of contango within the futures market, these approaches can experience a performance drag when transitioning between contracts. Additionally, these strategies do not purchase and retain EUAs, which means they lack a direct impact on curbing CO2e emissions in the carbon market.

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