Andurand Capital Management, under the leadership of esteemed oil trader Pierre Andurand, has identified the UK carbon market as a key area for potential growth. The fund is placing its bets on a significant uptick in UK carbon prices, anticipating that this market will outshine other cooling commodities in the near future.
The UK government’s commitment to stricter climate policies, coupled with the country’s post-Brexit carbon market developments, is laying the groundwork for a potential surge in carbon allowances. Following Brexit in 2021, the UK established its own Emissions Trading System (ETS) to replace the EU’s carbon market. This system mandates that power plants, industrial facilities, and airlines purchase permits for each tonne of carbon emitted.
These permits, known as UK carbon allowances (UKAs) or carbon credits, are tradable commodities whose prices fluctuate depending on market demand and policy changes. By capping total emissions, the system compels businesses to either reduce emissions or acquire allowances, making it a crucial instrument in achieving the country’s climate objectives. Presently, the UK carbon price trades at a discount of over 20% compared to its EU counterpart, a gap that investors like Andurand view as a promising opportunity.
Notably, the Labour government’s efforts to address a £22 billion fiscal deficit and expedite decarbonization could benefit from a rise in carbon prices. Mark Lewis, head of research and portfolio manager at Andurand, is optimistic about the UK carbon market, predicting a potential 50% increase in prices in the short term, potentially surpassing £60 per ton from the current £42 per ton level. Lewis attributes this forecast to anticipated policy shifts aligning the UK market more closely with the EU’s, where prices have surged following emissions cap tightening.
Lewis emphasizes the unique growth potential of the UK market, driven by policy changes that could propel prices upward. Investors are increasingly eyeing UK carbon credits as an appealing opportunity within the compliance carbon market. Several forthcoming developments could drive UK carbon prices higher and closer to EU levels, including the potential linkage of the UK and EU ETS to enable permit trading across regions, which could narrow the price gap significantly.
The UK government is also contemplating raising the floor price for allowances to establish a minimum price, prevent sharp declines, and offer stability to businesses. Moreover, the introduction of a mechanism to remove excess permits from the market could constrain supply and boost prices. Reducing the allocation of free allowances to industries is another measure under consideration, aiming to elevate demand and drive prices upward, fostering a more competitive and stable carbon market.
Despite the bullish outlook on UK carbon prices, uncertainties persist. The timing and specifics of key policy changes, such as linking the UK and EU carbon markets and altering permit allocation, remain unresolved. The growth of renewable energy sources like wind and solar has weakened demand for carbon permits, potentially limiting price increases.
Analysts caution that while the long-term outlook is positive, short-term uncertainties could lead to price volatility until details are finalized. Hedge funds are increasingly turning their focus to the UK carbon market, with investment funds recently placing a record number of bets on rising UK carbon prices, indicating growing confidence in policy-driven catalysts propelling prices higher.
The UK carbon market has the potential to emulate the success of the EU’s carbon market reforms in 2021, which saw prices skyrocket by nearly 150%, offering lucrative opportunities to early investors. Andurand and other hedge funds are aiming to replicate this success in the UK, as a combination of policy changes and market dynamics is expected to drive prices higher in the coming months.
For investors like Andurand, the UK carbon market represents a rare opportunity to profit from the energy transition while supporting efforts to combat climate change.
