There are too many “tourists” in the EU carbon market, which cause allowance prices to follow “rubbish stuff”, thereby causing unnecessary volatility, a panel heard Wednesday.

Speaking at the Carbon Forward virtual conference, Per Lekander, partner and portfolio manager at Lansdowne Partners and a veteran participant in the EU ETS said the increase EUA prices has attracted many new investors who tend not to properly understand the dynamics.

“What I find difficult is there are many tourists in this market. There are, I would claim, quite few who do serious work here, and therefore it becomes very sentiment-driven by rubbish stuff from time to time, which creates unnecessary volatility,” he said.

“Sometimes, I can’t find a justification for [price moves] other than it’s ‘risk-on, risk-off’, which I think is driven to some extent by quite a lot of non-fundamental participants.”

This is a growing view by long-time market players, who point to closer correlation sometimes between EUAs and equities – two asset classes that fundamentally have little to do with each other.

Some traders have also observed closer relationships between carbon and things like copper or Bitcoin, while other stakeholders including big emitters and lawmakers have complained about the market’s wild volatility, which they say is being fuelled by new participants.

EUAs are gaining in popularity with retail investors, who can now access them via spread betting or ETFs like those offered in the US by KraneShares, including its Global Carbon ETF (ticker: KRBN), which hit $1 bln in net asset value this week.

“KRBN has a huge retail following – the FinTwit, the direct-to-market investors have really picked it up,” said Luke Oliver, managing director and head of strategy at KraneShares.

The influx of new EUA investors has also been welcomed by experts, including some speaking at last year’s Carbon Forward event.

With regards to these inexperienced “tourists”, Oliver also took a more constructive view.

“If people come to the carbon market that don’t necessarily know it, if they’re not as informed or sophisticated then there’s opportunity for those that are. And if those more transitory investors do a great job, then they deserve to be there,” he said.

“We shouldn’t be too afraid of the democratisation of the market. This is what breathes life into the market, it raises awareness, it brings liquidity. It also supports these markets, and aside from the investment case, I think we all want them to succeed.”


Oliver added that KRBN has seen big investments from institutions, with “ESG running through all of this”.

Several panellists echoed that view, noting that EUAs are also becoming a tool for diversification by more and more institutional investments, including those seeking ESG components.

“In terms of the environmental aspect of [EUAs], it’s really a pure play, and there are very few of them out there,” said Ulf Ek, chief investment officer at Northlander Commodity Advisors.

“But you end up with headline risk when it comes to ‘is it really environmental?’ There are all these issues that may affect an ESG portfolio.”

“I think carbon is really a replacement for traditional commodities when it comes to investing, and I think as people decarbonise a portfolio, what do you do with your large carbon footprint when you think about commodities, you’ve now got carbon as almost like a new asset class,” Oliver added.

“But we haven’t even really hit the tip of the iceberg, we haven’t got the largest market in the world, which is the financial intermediary (advisor) market in the US.”

By Mike Szabo – [email protected]