According to the National Oceanic and Atmospheric Administration, CO2 levels have risen around 41 percent since 1990. While the detrimental warming effects threaten the planet and biodiversity, a plan to reduce carbon emissions won’t show success immediately.
As a result, carbon credit programs have become a niche that is slowly gaining traction in various world areas.
Due to its popularity and the fight against the greenhouse effect, many want to know more about carbon credit stocks and their profitability.
A company can gain carbon credits by offsetting their carbon emissions by using less than their allotted cap or purchasing credits from another company that has more than they need.
The latter method helps organizations to still reach the target amount of emissions even if they don’t reduce the CO2 they emit.
I’ll go over carbon credits in more detail, how you can invest in these stocks, and which stocks are the best on the carbon marketplace at the moment.
Table of Contents
- What Are Carbon Credits?
- Where it Started
- Types of Carbon Credits
- What is the Carbon Marketplace?
- Methodology: Which Stocks Make the List?
- What Makes a Good Carbon Credit Stock?
- Best Carbon Credit Stocks on the Market
- 1. KraneShares European Carbon Allowance (KEUA)
- 2. KraneShares Global Carbon (KRBN)
- 3. iPath Series B Carbon ETN
- 4. KraneShares California Carbon Allowance (KCCA)
- 5. Orbital Energy Group, Inc. (OEG)
- 6. Sunworks, Inc. (SUNW)
- 7. Canadian Solar Inc. (CSIQ)
- 8. Brookfield Renewable Partners L.P. (BEP)
- 9. Plug Power Inc. (PLUG)
- 10. Carbon Streaming Corporation (NETZ.NE)
- Sectors That Are Trending Upward
- Clean-Energy With New Technology
- Electric Vehicles
- HVAC Systems
- Utility Giants
What Are Carbon Credits?
The first Emissions Trading System, or ETS, emerged from the European Union’s desire to reverse the effects of pollution. They aimed to decrease the emission of greenhouse gasses by 55 percent or more, below the levels recorded in 1990. Intending to achieve by 2030, the European Union ETS came forth in 2005.
This program fueled others to create similar organizations and programs, including reducing emissions regionally in California and New England.
The primary goal of a carbon credit is to force companies to emit less CO2 steadily and efficiently.
Carbon credits are also known as carbon allowances.
They are a permission from the government to pollute. These sanctions get offered to companies that pollute, often like cement manufacturers or utility managers. Owning carbon credits allows these businesses to expel a specific amount of carbon and other greenhouse gasses every year.
Some polluters are more effective at lowering their emissions, and therefore, they can sell residual credits to others.
With time, the government can shrink the credit they give, making companies even more efficient by investing in greener technologies.
Where it Started
In 1997, the Clean Development Mechanism by Kyoto Protocol attempted to initiate a carbon credit trading system on a global scale. It never got off the ground, but some of the largest polluters in the world, such as India, are not on board with healthier carbon manufacturing options.
The three most notable trading schemes in existence are the two in the United States and the one program in the EU.
In May 2021 and July 2021, the UK and China began their programs as well.
Just by purchasing and investing in carbon credits, agencies channel finances to ecosystems and economies struggling severely. Therefore, funding for this niche mitigates the effects of climate change while contributing to tangible improvements throughout the community.
Funding ensures better living conditions and economic, environmental, and social benefits worldwide. Carbon credits are the cornerstones of climate stocks and finances from private and public sources.
Futures contracts occur when companies create a binding agreement with one another to purchase carbon credits later.
Types of Carbon Credits
There are two forms of carbon credits that you can invest in, Voluntary emissions reduction (VER) and Certified emissions reduction (CER). VER refers to a carbon offset that you can exchange OTC (over-the-counter) or on the voluntary market for carbon credits.
CER is an emission unit (credit) that gets created via a regulatory structure with the expressed purpose of offsetting or neutralizing a company’s carbon emissions.
What’s the significant difference between the two? The CER receives regulation from a third-party entity that certifies the credits, whereas the VER does not.
What is the Carbon Marketplace?
So, when you’re interested in purchasing carbon credits, you have to understand the carbon marketplace and how it’s profitable to an individual versus a company.
What access do you have to the carbon credits, and is it risky?
There are two distinct markets that investors can explore. The first is regulated, set up by the “cap-and-trade” regulations at state and regional levels.
The other carbon marketplace is voluntary, and both individual consumers and businesses can purchase credits to reduce their carbon footprint and engage in more efficient emissions.
The regulated market is mandatory. The other is up to the company or individual investor if they want to participate.
As mentioned, the regulatory market operates based on the credits that each company gets per year. If they stay under the cap, they end up with a surplus of credits.
Other companies with older equipment and less systematic operations may go above their credits based on how big the company is and how efficiently they run their operations around industry benchmarks. That doesn’t necessarily mean that the credits given will adequately cover the company’s needs.
The major companies are doing their part overall, or they have at least announced a plan to support the cause. They might be years away from actually reducing their emissions as much as required.
However, they still have to provide services and goods to get the profit to be able to improve their carbon operations. Yet and still, they may still fall a little short as this carbon trading scheme is still relatively new.
There are several ways that someone can buy carbon offset credits, but here are the three most popular ways.
Directly Invest in a Carbon Offset Project
Investors can provide financial backing for various carbon offset projects in exchange for rights to the credits the project will eventually generate. They don’t get rights to all credits but a portion.
This route allows the buyer to get involved in the logistics of project registration and development better to understand the strengths and weaknesses of your investment. Buyers will also get credits at a lower price than if they go through third parties.
Engage in a One-Time Transaction for Credits From a Project Developer
At times, there are project developers that need to find buyers because they have credits that didn’t get sold. Buyers can avoid transaction costs if they purchase directly from the project developer. They will also still get access to the company to participate in methodology, future development, and more.
The project developers are motivated to sell the credits so the buyers can do their due diligence to lay claim to stakes in a climate project.
Purchase Credits on an Exchange
The most popular way to buy credits is to explore environmental commodity exchanges, particularly in Europe and North America. These exchanges list carbon offset credits that are available for sale, and they work with registries and brokers to facilitate transactions.
However, doing it this way is harder to get the necessary information to understand if the credits are quality. Even though they’re easier to get and the costs are low, you may be in the dark about the ins and outs of the project.
Methodology: Which Stocks Make the List?
Around the world, the carbon marketplace experienced 20 percent growth last year, with projected growth as climate change becomes increasingly relevant. The government issues carbon allowances, which tracks price changes of these carbon credits, called “cap and trade.”
Serving as economic incentives, these allowances assist companies with achieving more environmentally friendly targets, or they’re in the form of credits to help offset their carbon emissions.
In the United States, President Biden has created the American Jobs Act, which includes $35 billion towards reducing the country’s carbon footprint significantly by 2030. As a direct result, there are multiple ways to go about selecting the best carbon credit stocks.
This plan extends tax credits to businesses that are already using low carbon emissions, and it encourages other American companies to reduce their emissions to help with the cause.
Before I get into what makes a stock quality, I’ll disclose the method used to select companies to analyze and compare to one another. I began with companies that were already in the clean energy sector, as they were likely at the lower end for carbon emissions, to begin with.
That means they would have more credits available because they have room beneath the cap limit. Also, hedge funds played a major role in how I selected the best stocks. There are entire hedge funds (and ETFs) that have stakes in only climate change stocks.
Some choices on this list have made it based on the number of hedge funds that have stakes in the company, and others are manufactures that have an incentive to switch to going green.
I have also included an honorable mention section at the end for companies that I expect to show a lot of growth by the end of the decade, such as the nuclear energy sector.
What Makes a Good Carbon Credit Stock?
For starters, there are two aspects to consider. First, the credit must constitute at least one metric ton of permanent, additional, unclaimed carbon dioxide emission removal or reduction. Secondly, it has to derive from activities that aren’t intrinsically harmful to the environment or society.
Governments can lower the carbon credits provisions available over time, which would make the price higher. What does that do?
It makes it more expensive to do business if you’re an offender that regularly abuses carbon emissions. But, for companies that sell their credits because they are consistently under the limit they gain more money from the credits.
For investors to purchase carbon credits, they have to utilize creative avenues. As an individual, you won’t be able to access carbon credit stocks directly. You will, however, be able to invest in exchange-traded funds or ETFs that have various types of stocks included.
That includes futures contracts, carbon offsets, carbon credits, and more. It’s important to note that a stock is an individual share in one company, while an ETF is an investment in multiple stocks at once.
They can get traded on the market the same way as you would a stock. In some instances, they are less risky, but that is not always the case, depending on the industry.
Let’s explore the best carbon and climate stocks on the market that you might want to consider as an investment.
Best Carbon Credit Stocks on the Market
Here are the top carbon credit stocks available in multiple forms within the market:
The KEUA is an exchange-traded fund that focuses its investments only in the European Union allowances. This stock is perfect for those that want to avoid the United States market altogether.
Similar to the previous ETF, it follows the IHS Markit Index. This particular index tracks the futures contracts most frequently traded in the European Union only.
Launched a few months back in October, this fund is still in the early stages and has a little less than $4 million in assets. Even though it’s still a small fund, a substantial market covers EU allowances. KraneShares discloses that $30 billion in EUA carbon allowances get traded each month for 2021.
Additionally, the association between traditional assets and carbon allowances is low, making EUAs a hedge.
- It’s an excellent choice for those that only want to invest in the European carbon market.
- EUAs are a considerable market.
- Buyers get access to a hedge fund.
- Recently launched in 2021.
- The 0.79 percent expense ratio is high.
The KRBN is the most sizeable carbon credit ETF on the market. As of July 2020, this fund took off, and it currently has more than $1 billion worth of assets. KRBN’s goal is to yield a return that surpasses the IHS Markit Global Carbon Index before fees and taxes.
The IHS Index reflects how well the most liquid segments perform within the global carbon credit market. This index provides a broader coverage of the cap and trade carbon credits by following the future contracts for the most traded carbon credits.
This company only puts money into futures contracts in the United States and in Europe. More specifically, it funds CCA (California Carbon allowances), EUAs, (European Union allowances), and the RGGI (Regional Greenhouse Gas Initiative). The last organization is a conglomeration of 11 northeast states in the United States.
- According to KraneShares’ website, the expected growth may double over the next few years.
- It’s the largest carbon credit ETF.
- It offers easy access to various assets within the global carbon market.
- It has a 0.78 percent expense ratio, which is slightly high for an ETF.
The iPath Series B Carbon ETN (exchange-traded note) gives investors insight into Barclays Global Carbon II TR Index (USD). More specifically, it offers exposure to carbon pricing through the Kyoto Protocol’s Clean Development Mechanism (CDM) and the European Union Emission Trading Scheme (EU ETS).
The iPath Series B Carbon exchange-traded note started in September 2019, and it has a current market cap of more than $100 million.
Buyers have to remember that this is an ETN, which is different from an ETF. Investors own the assets within the ETF. An ETN is more so like a bond backed by a financial institution and unsecured debt securities.
iPath doesn’t have any returns posted for this ETN. However, the Barclays index does show a one-year return of 146.79 percent. The fees are almost the same as with an ETF, including the expense ratio of 0.75 percent.
- This iPath ETN boasts a one-year return of 146.79 percent.
- It offers exposure through two carbon trading schemes.
- It has a market cap of more than $100 million.
- It has a high expense ratio of 0.75 percent.
This specific ETF from KraneShares is for the California Carbon Allowance program. The KCCA also just launched in 2021 (October), but it has shown appreciable growth, rising to $82 million worth of assets. The IHS Markit CCA Index frequently tracks all the futures contracts traded throughout California.
These carbon credits are a direct result of the cap-and-trade program for the CCA. It came about in 2012, a proposition from (CARB) California Air Resources Board. It seems to lower carbon levels to just 60 percent of the levels from 1990 by the year 2030.
By 2045, it wants to attain carbon neutrality. The KCCA has many more total assets when compared to the KEUA, but the total trading value is significantly less, totaling just $1.5 billion every month.
As an investment opportunity, a share in the KCCA is growing rapidly, with a $10,000 investment that would have already been worth more than $12,000 in just two months.
- This fund has a nice array of assets.
- An investment in this ETF at such an early stage yields high returns.
- The carbon credits are a part of the cap-and-trade program for California.
- It has a high expense ratio of 0.79 percent.
- It has a low trading volume.
Orbital Energy Group, Inc. is one of the few stocks that hedge fund holders have invested in despite it being less than $5 for every share, according to NASDAQ. This indicates that the cheap price doesn’t mean that OEG isn’t valuable for the money.
One reason for this could be that the company, which offers electric power and solar infrastructure, has received investment from multiple hedge funds globally.
OEG was recently given a contract to construct a rural broadband network of over 2,000 miles in Virginia. The agency has also vowed to offer support to the victims of Hurricane Ida, specifically regarding the utility infrastructure, which was in critical condition. This implies a long-term commitment to the communities in need.
Currently, four hedge fund owners hold a little more than $4 million in OEG shares, as of 2021, according to Insider Monkey.
- OEG is an attractive business to hedge fund owners because of its value and commitment to energy-efficient solutions.
- The shares cost less than $5.
- The company expects to grow and continue receiving more attention from hedge fund owners, which may increase the price to nearly $4.50 shortly.
- OEG is currently down in the market and has experienced a bit of stagnation in recent months.
With five hedge funds in the market database, totaling a little more than $3 million, Sunworks, Inc. has market analysts bullish regarding the future growth of this firm.
In October 2021, Jefferies Group, LLC, a world-renowned financial services company in NYC, projected that solar PV (photovoltaic) installation would grow by 25 percent.
The cause was that prices would remain high because of the production issues. Sunworks manufactures and sells PV-based power systems. The price of a share increased by more than 13 percent after this projection became public.
Sunworks, Inc. superseded the market predictions regarding earnings per share and revenue has grown by more than 230 percent year in and year out.
The firm increased its visibility this past June by joining the Russell Microcap Index. They also purchased a solar firm, Solcius, which is fast-growing, showing their investment in their growth as a company.
- Institutional investors have shown great interest in buying shares of Sunworks, Inc.
- This company is involved in five hedge funds.
- Market analysts are bullish on this firm’s potential growth.
- Penny stocks such as SUNW can be risky as they can drop suddenly with predictions from notable investment banks and financial institutions.
The United States Department of Energy distributed a report that detailed their study of solar futures, with the intent to shift close to 40 percent of the nation’s power consumption to solar energy.
That was on September 9th, and it falls in line with President Biden’s plan for green initiatives. This policy may get incorporated into the American Jobs Plan, which would benefit companies like Canadian Solar Inc.
Analysts are optimistic about the company’s growth, with a representative from Citigroup giving this stock a Buy rating in August and a target price of $57.
CSIQ is in 13 hedge funds, with stakes reaching $95 million. At the moment, investors can pay less for entry into the solar panel sector of energy stocks. The government recently decided to reduce solar panel imports from China.
The result across the stock market was a pullback in solar stocks, which caused the share prices to drop. Many view the move as temporary, believing that once it gets lifted, the increased demand will cause the prices to get higher.
- Smart money (funds invested by experts appears to favor Canadian Solar, Inc.
- This company benefits from the proposal to shift to a primary energy source for the nation.
- Those that want to invest in solar energy firms can enjoy lower prices due to a recent sanction on solar panel imports from China.
- The prices for each share might get higher after the ban on China gets lifted.
Within the renewable energy sector, Brookfield Renewable Partners L.P. is a trustworthy firm. They own a large array of power facilities around the globe. One share has a target price of $45 at the end of June.
This particular stock is excellent for those that want to receive regular dividends. In August, they declared a forward yield of 3.17 percent and a payout of $0.304 for each share. They beat the expectations around the market by producing over $90 million in earnings.
Renaissance Technologies is one of the top shareholders of all hedge funds tracked by Insider Monkey, with 203,417 shares of Brookfield Renewable Partners L.P. stocks. Their shares amount to nearly $8 million.
In 2021, another asset management firm, ClearBridge Investments, highlighted that this company’s globally diverse renewables business features multi-technology strategies that make it an appealing partner.
- This firm pays regular dividends.
- The price of one share is still relatively low.
- Twenty hedge funds have stakes in this company, indicating the value for the price.
- Brookfield uses leverage often, with a debt-to-equity multiple of close to 8.2 times. That may indicate a large risk.
Plug Power champions an innovative method of honing energy, which is hydrogen fuel cell solutions. Though this clean energy technology doesn’t get as much attention as hydro and solar power energy, there’s reason to believe that it has the potential to become more popular in the future.
PLUG has demonstrated enormous growth as a company over the previous few years, with share prices increasing more than 61 percent in just one year. It’s a climate change stock worth looking into, as some analysts are coming around to the hype around the new technology and its buy rating.
Thirty-four hedge funds have invested in Plug Power, Inc., and the leading firm DE Shaw. This company has 14 million shares that are worth over $507 million. While the stock is up and coming and the prices haven’t yet gotten exorbitant, PLUG is a decent stock to invest in if you don’t mind long-term commitment for a higher return.
- The clean energy technology used by this company is becoming more well-known.
- The share prices are still fairly low.
- It has a strong buy rating by market analysts.
- There is concern that the hype around the stock may die down over time, causing the numbers to drop and the return to be much less than anticipated.
This company has a growing portfolio of carbon credit streams that are high-quality. They provide the capital to fund multiple carbon offset credits projects, giving them the right to a fixed portion of future credits. NETZ provides an amazing amount of exposure to carbon market growth.
Carbon Streaming Corporation is a royalty-type company led by a management team with over 20 years of experience in investing and stream financing.
They offer one of the only ways to get exposure to the compliance and voluntary market. There is also a lot of growth expected for this company because they fund various carbon projects around the world.
The anticipation for carbon credit appreciation means it will yield high results over a few years. Simply put, the limited supply coupled with the rising demand makes this a profitable business venture with a low share price of a little over $13.
- The corporation has a team of highly experienced advisors.
- The share price is still low at just under $14.
- Buyers have access to both markets through this corporation.
- Investors would have access to a diverse range of assets.
- This stock may not be the best option for those that expect a high return in a short amount of time.
What to Expect?
Consumers can purchase carbon credits in various ways, and it behooves investors to do their research to find the highest quality credits. If you want to support the cause to fight climate change, investing in ETFs that have a diverse array of stocks is one of the safest and least risky methods.
Getting involved in projects that aim to reduce their carbon footprint gives you direct access to the strategies. It can be profitable to grow as the topic becomes more relevant to companies worldwide.
See Related: Best Green Ammonia Stocks to Invest in Today
Sectors That Are Trending Upward
Some sectors will likely experience a strong growth surge in the next few decades, and investors should keep their eyes open for investment opportunities. Four industries that will benefit immensely from the energy shift plans can turn into handsome short-term and long-term business ventures.
Clean-Energy With New Technology
The first is the clean-energy sector. I’ve included some stocks from that sector on this list, but others didn’t make the cut because they are too new and haven’t gained recognition just yet.
Certain clean technologies still require a bit of development, and it could be years before they’re a viable option to decarbonize the company’s emissions. Stocks from this sector with strong cash flows and entry barriers will perform well.
Next up is the electric-vehicles market. This sector has shown enormous growth potential, according to Morgan Stanley analysts. Due to standard automobiles and the industry overall is a primary source of carbon emissions, investors can look toward a huge shift to electric vehicles.
Analysts believe that there is reason to believe that trillions of dollars will get invested in the effort to develop high-tech, sustainable transportation. One key player that could benefit from the surge is Aptiv, a notable electric vehicle raw materials supplier for EV batteries and other components.
This company’s stock has grown more than 131 percent this previous year, and it will likely continue. The problem is that the growth potential appears under-appreciated throughout the market.
Heating, ventilation, and air conditioning (HVAC) is another industry that’s trying to set the foundation for more energy-efficient technology. Companies in this sector have created goals and purchased technology enhancements that could generate higher paybacks for customers and potential investors.
Analysts from Morgan Stanley anticipate that companies that produce HVAC systems with efficiency in mind can double their market revenue in the next 20 years. The top contender in this arena is Johnson Controls (JCI).
At the moment, power, utility, and renewables companies are trying to go from high levels of carbon emissions to drastically lower levels by 2050. American Electric Power and Occidental Petroleum are the two front runners in this sector that have a lot to lose or gain.
American Electric Power announced that they’d like to cut their emissions by 80 percent by 2030, and reach net-zero emissions in 30 years. That’s a lofty goal considering their high levels throughout the 2000s, but as they work toward this goal and show results, stock shares might soar in price.
Occidental Petroleum, on the other hand, has already dramatically begun trying to decarbonize its business while also investing in other low-carbon technologies. They have provided financial backing for renewable fuels, hydrogen power, and carbon capture.
Carbon capture is to trap the carbon emitted in excess by other companies and then store it deep underground. This business practice could be worth nearly $230 billion by 2050 if it shows success blocking additional CO2 from entering the atmosphere.
Both stocks from the previous utility companies have dropped over the last ten years, despite their efforts to get on board with the green technology efforts. The primary problem is that the carbon market is more interested in the rate of change instead of absolute CO2 emissions.
The companies might position themselves to spearhead the decarbonization rally in the future. But as of now, they offer aggressive carbon cut goals with cheap valuation. Nonetheless, these utility companies and others are taking a step in the right direction, and it may pay off for everyone in the end.
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