Investing in Carbon Credits

Abstract

Compliance carbon allowances are an important tool to reduce carbon emissions and align production and consumption with the Paris Agreement. The four sizable compliance carbon allowance markets accessible to investors are those of the European Union, the United Kingdom, California, and the Regional Greenhouse Gas Initiative in the United States. The authors document the liquidity of futures traded on the carbon allowances of these four markets. Return correlation between markets is limited, leading to diversification benefits for global carbon investors. Global carbon market returns also provide diversification opportunities for investors in conventional asset classes such as stocks, bonds, and commodities.