Carbon has become a liquid and investable asset class that now trades approximately US$1 billion per day across physical carbon, futures, and options. Carbon has exhibited attractive historical returns and a low correlation with other asset classes, making it potentially attractive within a diversified portfolio. Because of the design parameters of an VERs, CCERs and ETS, including the objective of higher prices and lower emissions, there is a well understood and logical case for a forward-looking risk premium for carbon.
•The Carbon Composite has generated an annualised return of 22% since 2012 and a Sharpe ratio of 1.08, reflecting a higher risk-adjusted return than traditional asset classes.
•Carbon as an “asset class” has exhibited no correlation with other asset classes, making it potentially attractive as a portfolio diversifier.
•Carbon has a prospective annualised risk premium up to 2030 of between 6% and 12%, based on current prices and climate policy objectives.