UBS Asset Management is set to launch a new exchange-traded commodity (ETC) in Europe, providing physically backed exposure to EU Allowances (EUAs), the leading carbon credit globally.

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

The UBS European Physical Carbon ETC is expected to roll out later this week with listings on the London Stock Exchange in pound sterling (Ticker: CO2E LN), on SIX Swiss Exchange in euros (CO2E SW), and on Xetra in euros (UGHG GY). CO2E comes with an expense ratio of 0.75%.

Each unit of the ETC will be directly backed by allowances issued under the EU’s Emissions Trading Scheme (EU ETS). Established in 2008, the EU ETS is the world’s largest carbon emissions trading system and is a critical instrument in the European Union’s decarbonization efforts. It includes a broad range of entities such as manufacturers, power stations, and airlines, which collectively account for over 40% of the EU’s carbon dioxide equivalent (CO2e) emissions.

EU Allowances (EUAs), often referred to as “permits to pollute,” allow the holder to emit one tonne of CO2e. Entities under the EU ETS must secure a sufficient number of EUAs through auctions or allocations to cover their emissions, with significant fines imposed for non-compliance. This regulatory framework forces polluters to either reduce emissions or compete in the market to obtain additional allowances.

The EU ETS employs a gradual reduction of allowances over time, making it a powerful tool for achieving ambitious climate goals, such as those outlined in the Paris Agreement.

André Mueller, Head of Client Coverage at UBS Asset Management, commented: “While absolute greenhouse gas cuts are needed, carbon markets support net-zero targets by encouraging businesses to reduce their emissions. The UBS European Physical Carbon ETC provides investors with exposure to the EU carbon market in a simple and accessible way.”

For investors, this ETC not only offers exposure to the evolving energy transition sector but also historically low correlation with traditional asset classes like equities and fixed income, enhancing portfolio diversification potential.

CO2E represents the third physically backed carbon credit ETC in Europe, following the November 2023 launch of the €10 million Xtrackers Physical Carbon EUA ETC (XEAL GY) and the November 2021 launch of the €180 million SparkChange Physical Carbon EUA ETC (CO2 LN). Both XEAL and CO2 also invest directly in allowances issued under the EU ETS, with expense ratios of 0.79% and 0.89%, respectively.

Meanwhile, the €150 million WisdomTree Carbon ETC (CARB LN) offers indirect exposure to EU Allowances via futures contracts, with a management expense ratio of 0.35% and a swap fee of 0.45%. Investors should note that futures-based carbon credit ETCs can have specific drawbacks. In periods of contango within the futures market, these products may experience performance drag during contract transitions. Additionally, these strategies do not purchase and retain EUAs, meaning they lack a direct impact on reducing CO2e emissions in the carbon market.