Love him or hate him, most people would agree that Elon Musk is a genius.
There’s no getting around the fact he succeeded in building multiple major companies when no one else thought it was possible.
One of his biggest companies is Tesla… and one of the primary reasons Tesla survived its early growing pains is because they get to sell carbon credits.
These credits are given to carmakers that build and sell environmentally friendly vehicles. Most other car companies have to buy them.
That crucial benefit gave Tesla an advantage to help secure its future…
Many states in the U.S. have adopted some form of carbon trading practice, but others are lagging.
Due to the size, scale, and importance of the U.S. domestic oil and gas sector, plenty of states benefit too much to allow carbon trading. It’s simply more profitable to continue to produce oil and gas, and the vehicles that use them.
The fact that the U.S. is not a net exporter of oil and gas further disincentivizes a rollout of a national carbon credits program, regardless of what the Intergovernmental Panel on Climate Change (IPCC) report says.
On the other hand, Europe is a different story…
Ultimately, Europe’s solution is to support renewable energy because they don’t have large domestic oil reserves.
Almost every European Union country is an energy importer. As a result, the lobbying for green energy is a lot more popular in Europe. Meaning, politicians get a lot less push-back when they levy additional carbon taxes in Europe than they do in the U.S.
And, a lot of Europe takes the threat of climate change very seriously.
They are actively legislating for zero-carbon emissions, creating roadblocks to businesses by supporting carbon credit prices, and they’re providing subsidies to new industries like hydrogen and carbon sequestration.
Carbon sequestration is when they capture emissions at its source and either pump them underground or recycle them into usable products. As you might imagine, it’s a very expensive process.
Regardless of where people stand on this issue – when a government says they need prices to be at a specific level to support their pet projects, they have ways of making it happen.
So, it would be reasonable to think that carbon prices are dictated by the health of the global economy and demand for goods and services created by burning fossil fuels.
However, the reality is not quite that simple… it’s not a market-driven rate.
Instead, every year the EU sets up a competitive bidding process for the number of credits they want to sell. To ensure the price rises, they don’t supply enough to meet demand. Ultimately, they want the price to rise to more than €100 ($137).
What I recommend doing is buying carbon credits futures and hanging on for the time being.
However, if you simply wanted to invest in this trend via ETF, there are some good options.
For instance, the KraneShares Global Carbon ETF (KRBN) and the iShares MSCI ACWI Low Carbon Target ETF (CRBN) both track the European carbon credits price.
While the EU certainly wants to remake the economy to be friendlier to the planet, they also want to follow the U.S. into energy independence.
In fact, the unconventional oil and gas revolution was probably the catalyst to accelerate the EU’s plans. Before that, the U.S. was the world’s biggest consumer and biggest importer. Energy was not a point of competition between Europe and the U.S. like it is today.
This makes carbon credits an important factor in the renewable energy sector.
All the best,
Co-editor, Market Minute