CARBON - THE TRADE OF A LIFETIME?

Mar 13, 2021

This is not a long recommendation unless you are highly confident in your trading abilities and have the discipline to stop out and look for a better entry. For everyone else, waiting for a pullback to an area closer to the broader trend line is desirable. Always trade with an appropriate stop loss relative to your risk tolerance. This post is an idea, not advice.

Great, now that's out of the way, let me proceed.

Politicians have frequently told us that pollution shouldn't be free and that taxing carbon emissions will mitigate climate change. Some politicians, such as Prime Minister Trudeau of Canada, have explicitly stated his government wants to put a price on carbon, and they have succeeded in doing so. Canada intends on drastically raising their carbon tax to $130(usd) per metric ton by 2030, and other countries will likely follow suit. As carbon taxes become common among developed nations and governments attempt to transition to a "green economy," what does one imagine will happen to the carbon price? Will it go down to all-time lows? Will we somehow increase carbon supply, making it dirt cheap, even as we attempt to eliminate and tax emissions? Governments worldwide are now trying, for better or worse, to rid the world of carbon emissions. In other words, reduce the supply of carbon.

What happens when you reduce the supply of a commodity? Logic tells us that the price should go higher. As of this post's writing, the price of carbon is $28 per ton of CO2. The World Bank estimates that carbon allowances must reach $50-$100 per ton of CO2 to achieve the goals of the Paris Agreement. As emitting CO2 becomes more expensive through taxes and carbon allowances, the supply of carbon should shrink, driving up the price.

KRBN is a relatively new ETF that tracks the HIS Markit Global Carbon Index. The index covers major European and North American cap-and-trade programs. Please view their website for more information.

Looking at the chart of KRBN I can't help but notice when the record volume began pouring in. Whether or not the price increase is directly related to Biden's stimulus plan, we will never know. Nevertheless, the writing on the wall seems clear: the price of carbon must go up as world leaders attempt to coordinate the biggest supply squeeze in history. Keep in mind that KRBN and the HIS Global Carbon Index are up over 50% since Nov 2/2020—perhaps when it became clear to a subset of investors that Biden would take the Presidency and bring the U.S. into the Paris Agreement.

It's not hard to imagine a future where emitting carbon becomes expensive beyond belief, but this is not a guaranteed outcome. If carbon capture technology becomes widely adopted, there may be a considerable supply increase as the captured carbon is put to other uses. In my opinion, this seems unlikely but is worth mentioning.

Dec 8, 2021

Note

It has been 188 days and 85% in gains since our initial assessment of KRBN and things have gone better than anticipated. We have taken 1/3 of our total profits at the close of today and will leave the rest in the market anticipating more upside in 2022. It is wise to take profit as the market makes it available and given the current price trajectory we felt it a good time to cash in on a portion of our position.

The risk to reward does not favor reward at the current price, so anyone looking to add to, or start a position would be wise to wait for a better moment when a probable edge is present. If you choose not to take any profits at this time keep in mind nothing is guaranteed and there may be significant volatility before we see higher highs again.

Congrats to longs who did their own due diligence and used our idea as a launching point for a great trade. Here's to hoping for more gains in 2022!