WisdomTree has re-launched Europe’s only ETP providing exposure to carbon emission allowances.
Carbon emission allowances represent a market-based approach to controlling pollution.
The WisdomTree Carbon ETP has been re-listed on London Stock Exchange in US dollars (Ticker: CARB LN) and pound sterling (CARP LN) while also making its debut on Xetra (WCO2 GY) and Borsa Italiana (CARB IM) in euros. It houses $50 million in assets.
Initially launched in 2008 as the ETFS Carbon, CARB was taken over by WisdomTree as part of its acquisition of ETF Securities’ European ETP business in 2017.
However, WisdomTree was forced to close the ETP in June 2020 after the ETP’s swap counterparty, Shell Trading Switzerland, terminated the swap agreement along with eight oil ETPs amid extreme volatility in oil markets.
Similar to the original product’s design, the revived ETP tracks changes in the ICE Carbon Emission Allowances (EUA) futures contract, the most liquid exchange-traded carbon futures contract globally. The EUA futures contract is part of the European Union Emissions Trading Scheme (EU ETS), the world’s biggest carbon market and the foundation of the EU’s policy to mitigate climate change and reduce greenhouse gas emissions.
Under the EU ETS, a cap exists which limits the amount of greenhouse gases that can be emitted by companies each year. A fixed number of carbon allowances are issued annually with companies required to hold enough allowances to cover their emissions. 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.
Nitesh Shah, Director of Research at WisdomTree in Europe, said: “The EU ETS has firmly established itself as the pre-eminent model for a cap-and-trade carbon abatement system. Its success is seeing a material reduction in greenhouse gas emissions from the sectors and countries covered by the scheme. Futures based on the European carbon market are the most liquid in the world and present an investment opportunity for investors looking to contribute to price discovery in this vital market. Further investor involvement could boost the futures liquidity, continue to improve this market, and further this cause.”
While many commodities have a series of futures contracts with expiration dates for each month of the year, the EUA futures contract is annual and expires in December. The ETP provides exposure to the current year’s EUA futures contract, rolling its position into the following year’s contract over a ten-day period starting in mid-November.
CARB is not an exact replicant of its predecessor, however, having been updated with new features that aim to better manage counterparty risk.
Firstly, WisdomTree has appointed two counterparties – Citigroup and Merrill Lynch – to diversify the risk of one counterparty terminating the swap agreement.
Secondly, the ETP utilizes a fully-funded swap structure whereby the cash invested in the ETP is used to purchase a basket of securities that is posted as collateral in a custody account pledged to the ETP. The collateral remains the property of the ETP, providing investors with recourse should the counterparty fail.
CARB is now also cheaper than its predecessor, having been re-listed with a management expense ratio of 0.35%, down from the 0.49% that the ETP charged when it was shuttered last year.