TD Asset Management has launched a new ETF in Canada providing exposure to cap-and-trade carbon allowances.
Carbon credits represent a market-based approach to controlling inflation.
The TD Global Carbon Credit Index ETF (TCBN CN) has been listed on the Toronto Stock Exchange with a management fee of 0.65%, the lowest price tag amongst carbon credit ETFs in North America.
In a typical cap-and-trade regime, a limit (or cap) is set by a regulator, such as a government entity or supranational organization, on the total amount of specific greenhouse gases, such as CO2, that can be emitted by regulated entities, such as manufacturers or energy producers.
The regulator may then issue or sell individual emission allowances to regulated entities. Polluters that want to increase their emissions must buy allowances from others willing to sell them, thereby representing a market-based approach to controlling pollution.
By incrementally scaling back the number of allowances over time, cap-and-trade regimes represent a powerful policy tool for achieving ambitious climate targets such as those set out by the Paris Agreement.
For investors, as well as delivering exposure to the energy transition economy, carbon credits have historically exhibited a low correlation to traditional asset classes such as equities and fixed income, offering the potential to enhance portfolio diversification.
The fund is linked to the Solactive Global Carbon Credit CAD Hedged Index which measures the performance of cap and trade carbon emission allocation markets that are accessible via futures contracts and have sufficient liquidity and volume to allow for institutional participation.
Currently, the index only provides exposure to futures traded within the European Union Allowances (EUA) cap-and-trade program, the world’s oldest and most liquid carbon allowance market.
The EUA program, which covers approximately 40% of the EU’s total emissions, aims to reduce carbon levels to 45% of 1990 levels by 2030 and achieve carbon neutrality by 2050.
The index rolls its exposure to the current active contract into the next active contract over a ten-day period. Foreign currency exposure is hedged back to the Canadian dollar on a regular basis.
There is currently one other carbon credit in Canada – the Horizons Carbon Credits ETF (CARB CN) – which has a management fee of 0.75%. CARB tracks the proprietary Horizons Carbon Credits Rolling Futures Index which also covers the EUA cap-and-trade program.