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Hedge funds bet on carbon markets amid green push

·2 min read
A coal-fired power plant in Germany
A coal-fired power plant in Germany

Hedge funds are piling into carbon permits in a bet that their value will continue to soar in the clampdown on fossil fuels.

The price of allowances traded in Europe hit a record high on September 9 of €62.75 (£54.14) amid expectations of restrictions on supply and use of coal-fired power stations over winter.

Financial players held a net long position of about 42m allowances in September compared with about 28m at the same point last year, according to European Securities and Markets Authority data.

Ulf Ek, chief investment officer at London hedge fund Northlander Commodity Advisors, said: “I think carbon emissions in Europe will continue to go higher for the foreseeable future. The current price is not yet corresponding to the cost for society of climate change.”

Under the European Union’s Emissions Trading System, manufacturers, power companies, airlines and others must pay for each tonne of carbon dioxide they emit by buying a carbon permit. Sectors are given a cap on the amount of carbon they can emit each year and polluters can trade the permits. The UK has set up its own scheme after Brexit.

Prices fell to as low as €5 in 2017. Concerns that the price was too low to encourage the switch to cleaner energy has led officials to try to prop up the price, with further efforts being discussed.

Rising carbon prices puts pressure on electricity prices, although fuel costs are a bigger driver of soaring prices.

Florian Rothenberg of ICIS, the commodities market specialist, said: “Upward pressure is from the fundamentally tight market this year and the expectation of a future scarcity of allowances.”

Mr Ek added: “It’s been a good economic investment so far. We think prices will continue much higher and make it a great investment in the coming year.”

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