Turning Carbon Into Capital: The Investment Case for EUAs

How EUAs Work

Each EUA acts as a permit allowing for emission of 1 metric ton of greenhouse gases; companies must turn in an EUA for every ton emitted. To aid companies in adjusting to the new cost structure, the EU freely allocated a large percentage of EUAs. As the chart shows, the free allocations will end by 2034- at which point companies must purchase all required EUAs.

Supply and Demand

Long viewed as a commodity, EUAs generally price because of supply/demand dynamics. Each year the EU reduces the number of EUAs issued while expanding the list of industries covered.

EUAs are a commodity where a central regulator sets both the supply and the demand in the furtherance of governmental policy.

Source: Vertis Environmental Group

This chart shows how free allocations of EU carbon allowances (EUAs) are being phased out under the EU Emissions Trading System.

In 2025, about 550 million allowances are distributed for free, but this number declines steadily to zero by 2034.

Non-exposed sectors¹, which face little international competition and lower risk of moving production abroad, lose their free allocations the fastest.

Exposed sectors², such as steel, cement, and aluminum, which are at higher risk of carbon leakage due to global competition, see a slower phase-out.

CBAM sectors³, like cement, fertilizers, and electricity, are phased out between 2028 and 2031 as the Carbon Border Adjustment Mechanism begins to impose equivalent carbon costs on imports.

Aviation also declines steadily, and by 2034 all industries must purchase 100% of their allowances, reinforcing the carbon price signal and accelerating decarbonization.

Impact for Investors

Investor ownership of physical EUAs is potentially one of the most environmentally impactful investments that can be made in public markets. Every physical EUA owned by an investor is one less available for companies to use, increasing their scarcity value.

EUAs as a Hedge

Portfolios with exposure to the EU economy can also use EUAs as a strategic hedge against rising carbon costs. Recent academic studies are showing how the price of carbon can impact equity market prices.

Whether you are investing as a hedge for an existing portfolio, seeking an impactful ESG investment or interested in a commodity play, EUAs offer a compelling investment thesis.

Definitions

1. Non-Exposed Sectors: Industries with low risk of carbon leakage, either because they face little international competition or have lower emissions intensity. Their free allocations are reduced more quickly than those of exposed sectors.
2. Exposed Sectors: Industries at high risk of carbon leakage because they face strong global competition and are highly carbon-intensive (e.g. steel, chemicals, glass). They received more free allowances in the past to remain competitive but will see a gradual phase-out.
3. CBAM Sectors: Industries included in the Carbon Border Adjustment Mechanism (e.g. cement, steel, aluminum, fertilizers, electricity, hydrogen). Free allowances are being phased out as imports will face equivalent carbon costs at the EU border.

Disclaimer

Historical trends and past performance is no guarantee of future results.  The information above is not intended to represent the performance of any product, fund or strategy and the performance of a particular product, fund or strategy will differ based on a number of factors, including the investment strategy, risks, fees and expenses. 

An investor should consider the Fund’s investment objectives, risks and fees and expenses carefully before investing. This and other important information can be found in the Fund’s prospectus, Please read the prospectus, carefully before making an investment.

Information is for illustrative and educational purposes ONLY. This material is provided for informational purposes only and nothing herein constitutes financial investment, legal, accounting or tax advice.  Nothing herein constitutes a prediction or projection of future events or future market behavior. This material is intended as a broad overview of the European Union Allowance market. Nothing herein constitutes investment advice or a recommendation to buy, sell or hold a security. It should not be assumed that any investments in securities, companies, sectors or markets identified and described were or will be profitable.

This material is general in nature and is not directed to any category of investors and should not be regarded as individualized, a recommendation, investment advice or a suggestion to engage in or refrain from any investment-related course of action. This material is not intended as a formal research report and should not be relied upon as a basis for making an investment decision.  Investment decisions and the appropriateness of this material should be made based on an investor’s individual objectives and circumstances and in consultation with his or her advisors.  Information is obtained from sources deemed reliable, but there is no representation or warranty as to its accuracy, completeness or reliability. This material may include estimates, outlooks, projections and other “forward-looking statements.” Due to a variety of factors, actual events may differ significantly from those presented. Past performance is no guarantee of future results.  Investing entails risks, including possible loss of principal.