WisdomTree has launched the first ETP in Europe to provide exposure to cap-and-trade carbon credits issued in the California Carbon Allowances (CCA) market.

Nitesh Shah, Head of Commodities and Macroeconomic Research, WisdomTree.

The WisdomTree California Carbon ETP has been listed on London Stock Exchange in US dollars (WCCA LN) and pound sterling (WCCP LN) as well as on Deutsche Börse Xetra (WCCA GY) and Borsa Italiana (WCCA IM) in euros.

It comes with an expense ratio of 0.49%.

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 ETP is linked to the Solactive California Carbon Rolling Futures TR Index which reflects the movement in the price of futures contracts based on California Carbon Allowances.

California Carbon Allowances represent the first multi-sector cap-and-trade carbon scheme in North America. It seeks to help the State of California achieve its target of reducing greenhouse gas emissions by 85% below 1990 levels by 2045. Moreover, a recent shift in policy aims to reduce GHG emissions by 48% from 1990s levels by 2030 which is markedly higher than the prior goal of 40%.

The California cap-and-trade carbon scheme has expanded in recent years by linking with the province of Quebec to cover emissions from both jurisdictions. The scheme represents one of the fastest-growing carbon credit markets globally as well as the world’s second most-liquid carbon allowance market with approximately $1.7 billion worth of futures traded per month last year.

The new ETP complements WisdomTree’s existing carbon credit ETP – the $290m WisdomTree Carbon (CARB LN) – which offers fully collateralized exposure to European Union’s carbon allowances market.

Nitesh Shah, Head of Commodities and Macroeconomic Research, WisdomTree, said: “The California cap-and-trade program is a key element within the State’s plan to reduce GHG emissions and represents one of the largest multi-sector emissions trading systems globally, covering roughly 80% of California’s GHG emissions.  A portion of revenues obtained through California Carbon Allowance auctions are used to fund a range of environmentally friendly and climate change mitigating initiatives. California has laid out a path to cut emissions aggressively by 2045 and California Carbon Allowances will play a larger role in the policy toolkit than ever before. The success of the European Union Allowances (EUA) scheme provides a great example of what happens when policymakers get serious about cutting emissions.”

Alexis Marinof, Head of Europe, WisdomTree, added: “The process of reducing GHG emissions to net zero is an increasingly important focus for policymakers around the world. There is more emphasis on climate change mitigation than ever before but progress will be limited if investors and policymakers aren’t aligned and working together toward reaching climate targets. It is, therefore, imperative that investors have access to a wide spectrum of exposures. WCCA removes many of the barriers investors face when allocating to this asset class and builds on WisdomTree’s heritage of bringing hard-to-access exposures to investors through ETPs. We are building a range of differentiated and complementary ETPs that allow investors to participate in the energy transition through thematic equities, commodities, or carbon allowances.”