Global information provider IHS Markit has unveiled the IHS Markit Global Carbon Index, the first index to track the weighted average price of carbon credits globally, as represented by futures prices.
The index is the first to track the weighted average price of carbon permits globally.
Carbon credits are permits or allowances issued by governments that enable the holder to discharge a specific quantity of carbon over a specific time period.
Polluters that want to increase their emissions must buy permits from others willing to sell them, thereby creating a market-based approach to controlling pollution.
The index is the result of a collaboration between several of IHS Markit’s businesses including its indexing, environmental, and energy pricing segments, as well as with Climate Finance Partners, a specialist in climate finance.
The index tracks the performance of the largest, most liquid, and most accessible carbon markets. This currently includes the European Union Emission Trading System, as well as two US-based markets, the California Cap-and-Trade Program and the Regional Greenhouse Gas Initiative.
Other markets may be incorporated into the index if they satisfy a monthly trading requirement of at least $10 million. Eyes are on China which is expected to roll out its own emission trading scheme next year.
The weight of each market in the index is determined annually in November and is based on USD trading volume experienced over the previous six months. Any single geographical region (EMEA, US, APAC) is capped at 65% and each eligible carbon trading program will have at least a 10% weight in the index.
Sophia Dancygier, Managing Director and Head of Indices at IHS Markit, commented, “The IHS Markit Global Carbon Index creates a valuable new benchmark for corporations, investors, and financial services firms, all of which have to navigate the emerging but increasingly important markets for carbon credits.
“It also demonstrates our ability to apply our expertise in data, energy, and other major industries and capital markets to develop unique products to address the most pressing and complex information demands within business today.”
Eron Bloomgarden, co-Founder of Climate Finance Partners, added, “The IHS Markit Global Carbon Index creates an important benchmark which helps financial institutions to better assess and price climate-related financial risks. We see growing investor interest in carbon credits as an asset class.”
The price of carbon credits has rallied in recent years, driven by tighter regulations and the incremental reduction of permits which is aimed at addressing climate concerns.
As of 23 September 2019, the global weighted average price of carbon credits was just below $24, representing an increase of 132% since the start of 2018.
The index has the potential to underlie an ETP, though interest for such a product will be dependent on volumes and liquidity in the underlying futures markets, coupled with investor demand for tools to hedge exposure to climate change risks.
That said, such a product does already exist in the form of the WisdomTree Carbon (CARB LN)*, a London-listed ETP that uses swaps to provide a total return exposure to movements in the price of ICE European Carbon emissions allowance futures contracts plus a collateral yield. It comes with a management expense ratio of 0.49% and has assets of €23,260,711.
*Formerly ETFS Carbon