Carbon Market Investing with Luke Oliver

In this episode, our guest is Luke Oliver, Managing Director and Head of Climate Investments and Head of Strategy at KraneShares. Luke brings his carbon markets expertise to the show as we dive into a discussion about the trillion-dollar world of carbon trading. From tracing its growth over the past decade to projecting its future potential, Luke covers the complexities of this growing market, including how carbon trading has evolved from a niche corner to a global powerhouse with markets in Europe, California, and beyond, driving substantial investment opportunities.

Our conversation includes carbon market dynamics, from understanding the nuances of futures trading to exploring the role of carbon pricing in shaping investment strategies. We also  highlight the investment opportunities inherent in carbon trading, emphasizing its potential for substantial returns and low correlation with traditional asset classes. Luke  outlines strategies for integrating carbon exposure into investment portfolios, drawing attention to the role of carbon ETFs in diversification and risk management. We discuss forecasts, policy implications, and investment implications and uncover the immense potential and opportunities that lie in carbon trading. Whether you're a seasoned investor or a curious observer, this episode offers a comprehensive exploration of one of the most dynamic sectors in today's financial landscape.

Recorded April 9, 2024

Transcript

Paul Barausky  00:03

Well, hello, everyone and welcome to this episode of the Fat Pitch. I'm your host, as always, Paul Barausky and I'm joined by my co host, Clint Sorenson. It's been a little while since we've been able to have a guest– wanted to tell everyone who joined us today.

Clint Sorenson  00:18

Oh, man, I'm really excited about this. We have Luke. Luke, thanks for joining us again, we had you on last year, we talked about carbon markets. Really excited to get you on this year. So we have Luke Oliver, Luke, his accent is not where my accent is from. So he's not a North Carolina native and doesn't get the North Carolina barbecue like I do. But he's very bright knows all things about carbon markets, energy commodities. He's just a phenomenal mind. And I'm really excited to have you on the podcast. So Luke, tell our audience a little bit about yourself. And let's get this thing kicked off. Yeah,

Luke Oliver  00:48

Well, thank you, Clint. Thank you, Paul. Different accent. I'm from London originally, but I've been in New York for about 20 years. So I'm and I became an American citizen in January or February. So I'm fully on site now. So I work at Kraneshares, we manage and specifically my role at Kraneshares  had the climate business, which is about 10% of our assets. We're a $10 billion dollar asset manager, and, you know, focus on China, emerging markets, emerging technology. But where I focus is that where that technology meets the energy transition, and where carbon markets make up probably the lion's share of those assets. So it's we manage about $6-700 million in climate carbon assets. And this is an asset class that if you haven't heard about it yet, and hopefully you did last year, when we first got together on it, but it's very much emerging now or landing with investors. You know, we're seeing a lot of family offices, a lot of endowments, in particular, really engaged with carbon markets. And this is an investment first, and then climate adjacent second. So I always like to get that out of the way up front. Because often, people kind of think, oh, is this ESG? And I'm sure we'll talk about that. But this is an investment. And this is an investment that fits very solidly in a in a portfolio. 

Paul Barausky  02:03

Yeah. So how do you how does that occur? How do you differentiate so that I guess I would use the term the climate tail’s not wagging the investment dog, but the other way around? 

Luke Oliver  02:14

Yeah, very nicely put, I haven't heard it like that. I come across this every single day. And it's a 50/50, almost, whereby some people have, you know, teed up the meeting with we're an ESG, investor, an impact sustainable investor. The other half, I almost think it's sometimes it's a trap, and they want to get an ESG person in the room to be up. And, and the reality is, it fits both sides, because it actually runs straight down the middle. This is an investment. It doesn't matter what your view on ESG is, this isn't any this, this does not have any ESG label on it. This is an investment in compliance carbon markets, which are government regulated price on carbon. And what I tell investors, and this seems to resonate on both sides of the coin, is that this is first about investment. Secondly, regardless of what you believe, what you like, what you don't like, what you believe, and don't believe one thing is absolutely true. That is not up for discussion, because we all know it's true and see it every single day, that is government policy in all major government, Western governments, and spending in all major Western governments is aligned to decarbonizing. Now, you can tie that into the climate because I think it's very key. And for us, you know, we've looked at studied, you know, carbon concentrations in the atmosphere, the correlations of that increase, albeit quite small, relative, you know, carbon is only about 400 parts per million in the atmosphere. But I've been working on some people's Oh, how can that make any difference? Well, a tiny drop of cyanide in your milk can be quite fatal. And so, you know, that's a small amount of something can still be pretty catastrophic. And so we understand the science and the challenges around the climate side of things. But realistically, what this is about is low cost renewable, we need to hear renewable think infinite. So low cost, infinite technology is the goal. This is the goal of human civilization. For as long as we can remember, we need more energy, energy consumption is going exponential. And we need to do it in a very sustainable, reliable way. And that's why every government is in this arms race to be the owner and the leader in that renewable, low cost energy. So coal and gas have their place, they'll still have their place for some time. But if you kind of pivot from thinking, Oh, they're trying to kill the energy companies, these green lobbyists, too, we're trying to create complete energy independence and be the leader, the leading country in renewable and low cost scaled energy. It kind of puts it on its head a little bit. And that's what this is about. And that's why You've got if you think about policy, it's carbon markets. And we're going to talk about that. On the spending side, it's inflation reduction. And China is spending almost as much as the whole inflation reduction every year on renewables, Europe is spending about 288 billion every year, on the same, we're in a race for that technology, and having a robust carbon market accelerates, and catalyzes that innovation in your economy. So you can look at this with a pure capitalist hat on and say, I'm not interested in the climate, I'm interested in innovation, and the catalyst and being on the side of government policy and government spending, because we like it or not, that's where the dollars are going. So that's how I reconcile it. And I say that to both groups, and they get it. And then some people say, well, and it's and it's having incredible impact on the climate. And I say, yeah, that's, that's also true. So that, so that's how we come about it. And I also find that a lot of states that some people would think, would not look at something like this, like Texas, know more about this than anybody else, because they trade power and gas, and they trade energy markets. And this is part of those energy markets. So long answer, but this is, I can't say this enough. I'm not asking you to listen to me to tell you about something nice you can do with your money, this is an investment, it's also going to be a very powerful catalyst for reducing the amount of carbon in the atmosphere.

Clint Sorenson  06:23

Look, it sounds almost like a commodity of source, right? It's you just laid out a perfect case for this rising government wave of demand. Right? And then you start to think about supply constraints. And just in terms of energy consumption, I mean, even AI always talked about this a lot with with friends and colleagues, everyone, so you know, build up on AI, which great is changing the world, but the energy consumption, that that's going to require, ultimately, you have to get back to energy consumption. And cheap renewable or like you said, infinite sources of energy is really the goal. So walk me through what are carbon allowances? Right? If you think about this, it looks to me like it sounds to me like modernity of sorts, right there supply, there's demand. I can make case the investment case based on those two things. But walk me through the fundamentals of what are carbon allowances?

Luke Oliver  07:09

Yeah, yeah, and it's only very interesting here. They aren't like commodities, in lots of ways. They are also absolutely nothing like commodities in in one very vital way, which is, they should be prime, this is where the opportunity comes from, they should price like financials, because the difference between a financial asset and a commodity is the commodity is physical. It's expensive to pull out of the ground, it's expensive to transport. And so the price of commodities is always clearing, where supply and demand is today, the market is trying to price out a Futures Curve, whether it's different harvests, different OPEC statements, whatever it may be, in the carbon markets is one source of primary liquidity, these are government issued. Secondly, they don't go bad. They're free to store. That's it's an electronic record in your account. And so for that reason, it should price like a financial, but what we see is this very clear financial, valuation and trajectory that is incredibly attractive. So I'll give the punchline away, we're talking about potential 100-200% returns by 2030. In this market, so incredible upside, but yet, they're not pricing efficiently today, we're still getting periods of sell off, even though everybody agrees they're going to be 100% plus higher, in five years versus still people willing to go short, because they see the short term drivers, and it's creating a lot of opportunity for the patient, long term investor. So, you know, what are they? Well, it's a really, I got to be careful with my compliance work. But it's almost like a perfect storm of a product, because any good market has robust framework and regulation, to make it transparent, clear, robust, but then it is free for the market to price. And, you know, the New York Stock Exchange, everyone always says, that's the home of capitalism. It's also one of the most heavily regulated, you know, red tape, saturated places on earth. And that's good. It's a good good thing. It has all the laws and regulations to protect us. And then it's our risk to play in that market. And so carbon is just like that. So carbon, not to be confused with what's called the Voluntary Carbon markets, which is where people are doing forestry projects that we're not talking about that at all. It's not just forestry. But let's put all of that aside. If you hear about voluntary carbon, carbon credits, carbon offsets, we're not talking about that. Today, we are talking about what we call compliance carbon allowances. This is a $900 billion market. The other one is about a $2 billion market. This is massive. This is a massive institutional market. So what are they so carbon allowances are where governments and that the four big markets that we look at are Europe, the state of California, so you know, fifth largest economy in the world, the northeast of the US. It's a program called Reggie RGGI and it's you know, imagine New York, Massachusetts, Maine, Virginia, whole eastern sea northeast of the US their power generation. And the fourth one is UK. So Europe, California, UK and Reggie. And these markets are growing. I mean, at the moment they cover 23% of global emissions. But China, South Korea, Japan, Australia, New Zealand have all introduced programs like this. So they grow. But what they do is they set a number of allowances that they auction every year, and then by law, if you are polluting within that economy. So if you have a factory that emits carbon dioxide, you have to measure that in the same way we measure our income for our taxes, they measure that, and then they have to deliver one credit for every tonne of carbon that they emit. And so what happens is they auction these credits. And in the early years, they auction more than they need they auctioned, they're very generous, the price is low, your options allow all of these companies to buy as many as they need, and to put on hedges for the future. And then over time, they say wait, we want to reach our targets a 40% reduction in carbon emissions in Europe. So all they do is set the cap on how many they auction every year, to amortize down to a 40% reduction. And that means by 2030, by 2050, at the various different milestones, they're only going to give out and only sell enough permits to that level. Now, what's great about that is it doesn't mean you force anyone to do anything, people can keep polluting, but their cost is presumably going to rise as these become more scarce. Any smart company does not want to have to pay taxes, and they don't want to pay for carbon allowances. So it's simple, find easier way to do things. So that's how it works, they basically reduce the amount that they sell.

Clint Sorenson  11:47

So they're really controlling the supply significantly, knowing there's as well as demand, they're controlling the supply aspect. And they're the increased. And that helps because it increases the cost of compliance. So it incentivizes firms to aggressively buy these allowances on the front end,

Luke Oliver  12:03

Correct. It makes them buy them makes them hedge with them. Now, most of these companies will say, yeah, we'll buy them, we need them each year, they go and buy something, you'd get a very seasonal curve. But why this market is so dynamic is it allows speculators and that sounds like a bad word, sometimes in certain circles, but speculators are part of the market, you have hedges, and you have speculators. And the speculator's job is to create price discovery. And that's our job. And we see in both of these major markets, Europe and California, that they are undervalued relative to their fundamentals, relative to the demand supply imbalances that we see in the future. So a little bit like a commodity, as you said. And we know that if these were priced, based on the fundamentals, they'd be much more expensive. And so as speculators, it's our job to buy them, and to profit from that rise when they correct to the correct price. And when that happens, three really amazing things happen. This is the impact side, you get this massive revenue. It's also it's not like a tax, because you can hedge it. Imagine you could you could hedge your taxes and lock in your income from two years ago, and then grow your income. Without it. You know, it's fascinating how it fevers, innovation, it fevers, taking risks, and being here for thinking about managing your carbon emissions. But you get this massive revenue from the government that they then put into various programs, such as, you know, direct impact, you know, so helping lower income families, saving wetlands, converting municipal buses, from diesel to electric, or hybrid, all of these programs, you have this, this war chest that goes towards these programs. Secondly, you get fuel switching, if you're a company, and you have a very simple, you can change your filters, you can change a few small changes in your factory to make it pollute less, you'll just go and do that now. Because it's free money, you can save on your analysis, when polluting was free, you just didn't bother doing it. So we have this sudden, great, just very quick overnight improvement because it matters. Any CEO, any shareholder, any CFO is going to say, guys that spend a lot of money on these things, our carbon footprint, because it's going to save us money. So you're putting capitalism into the problem. And then thirdly, and this is the exciting part is you have all of these, these innovators, that if someone invented a carbon capture machine 20 years ago, if they would have got, you know, an award for cool invention, but they wouldn't have gotten any funding because there's no money in it. Today, companies are going to say you have an invention that can reduce my carbon bill, I'll pay 10 million for Excel, I'll monetize that over the next couple of years. And then I'll be you know, making huge strides and then all of a sudden you scale that technology and it becomes cheaper per unit. So it's a huge driver for innovation. That's how I see this more than anything more than a tax. I see this as a as an innovator. And I also see, you know, don't fight the Fed. There's a tightening forecast between now and 2030 and then 2030 to 2050 we get to be long that asset.

Paul Barausky  15:00

Will you give me an idea since I'm relatively new to this, what's the overall size of this market? If you can give us I think a lot of people would be curious.

Luke Oliver  15:12

Yeah. So between the auctions in the primary asset, and the futures markets that we track, and we're only tracking the four majors, it's about a trillion dollars, probably about $900 billion. 

Paul Barausky  15:28

So this is maybe a decade ago, and whether you expect it to grow. 

Luke Oliver  15:31

Yeah, yeah. So it's interesting, I think we're starting to get to critical mass in these in the major markets as they start, you know, so if I think we could increase by 100%, over the next few years, then I think it can double. But 10 years ago, it was much smaller, I usually look at sort of five years ago, it was in the, in the low hundreds of millions. So it's grown pretty exponentially every year, over the last sort of five years. And we think it continues to grow. And then at some point, it kind of matures, because two things happen. The number of credits, you know, as we bring down pollution, you start to have a smaller base, but a much higher price. So it starts to change over time. But between, we're in 2024, between now and 2030, is going to be the price is going to be the exciting time. That's when investors really can can benefit most from this. But it doesn't stop it goes on through 2030 onto you know, towards 2050. But I think if we get this right, the lion's share of the returns, will be captured in the next five or six years. But yeah, but to your point, it's a huge market. I mean, California, is about 65 billion every year. And that's the UK similar. And then Europe is the big one, Europe is like over 600 billion in itself. And so Europe is by far the biggest. But where it gets interesting is China is an even bigger market than Europe, in terms of its pollution footprint and the size of the market, but its trading volumes are low. So Europe still holds up as the biggest market. And when I say because so it's a little bit like talking about liquidity versus market cap, China's the biggest market cap if there's such a phrase for cover markets. But in terms of liquidity, it's Europe, followed closely by California and UK. So the top line number I use is we're pushing towards a trillion in trading. And so this is by no means a niche corner of the world. This is this is a real, this is a real model.

Paul Barausky  17:26

That's significant. Yeah. 

Clint Sorenson  17:29

Okay, so it's a great investment. You just laid out the case for pretty exceptional returns. How should a an investor or an allocator look at this asset? Where does it fit in a portfolio? Right, from a risk, correlation perspective? You know, What work have you guys done from a portfolio management perspective? Or portfolio construction perspective? 

Luke Oliver  17:48

Yeah, yeah. As far as Yeah. And at some point, I'd love to show people the good a couple of price models that we can get to, but would let me answer your question. Tell me what you want me to put those up? Yeah, yeah. So when you think about this in a portfolio, it's interesting. I, at times, I go to pains to explain to people why it's not a commodity. Because there's a lot of challenges with like the price of holding, you could be right about the direction of a commodity and still get it wrong, because of the cost of being long. The cost of rolling the futures. Carbon is not like that, despite some rumors to the contrary carbon. It's curve, because it's a financial, it's the Futures Curve. If I buy one year, carbon, it's going to cost about 5%. Now, you think, Well, that seems very expensive. But that's only because the futures market is naturally levered. And so you're borrowing so you're borrowing at the risk free rate, right? So that's all that is, because we're not levered in our fund, we're able to so if you give us $100, Clint, or Paul, I will buy $100 of carbon, but only need to put up $10 of margin for that the other $90 I can go and get the risk free rate. So we actually flatten that curve. So optically, some people say, but that Futures Curve is 5% contangoed, I see. Yeah, it is. But that's for people that are levered, we're not levered, and we aren't back 90% of the risk free rate in the money markets. So all of that is to say, in our fund, we're unlevered. So we don't really experience the majority of that contango, and you're just getting a pure play, for the most part on the carbon. So that means that you can be long and long for five years in carbon. Whereas with natural gas, that's not a nightmare. You can't do no trading, right? This is a long term position, you can put this on, and you can put this where you have so then then I flip this around and say, but where does it go? Well, wherever you put commodities, wherever you put thematic, wherever you have carved out space for that diversified return stream. So think about the three thing.

Paul Barausky  19:47

So knowing that and you're a manager of it. Who would primary investors be out there, which type of institutions, which type of individuals do you see right now as the cohorts to allocate to this? Yeah, well,

Luke Oliver  19:58

We see Some of the first investors were foundations that had been looking at this exposure in the private space. And then when we launched the ETFs, they were like, wow, you're just using just simplified this whole thing. So we had a very early rush of institutions, you know, foundations endowments, that were looking for this exposure, and they were, they were pretty ahead. I mean, I was surprised at how far ahead they were, in terms of research, because they came to us saying, like, you know, I mean, they didn't use these words, these are my words. But, you know, we came for the impact, but we stayed for the return and correlation benefits. And so that was the first wave. The second wave, were, you know, the single family offices, they were all out there, exploring carbon markets. So pretty much anyone willing to look at interesting ahead of their time, sort of avant garde investments have been looking at this for two or three years, at this point in investing. At this point, we're starting to see the more sort of forward looking REAs starting to get invested. We've recently been added to some of the I won't say the names, but some of the bigger wealth management platforms. So we're starting to see starting to put these on. So it's really exciting. 

Paul Barausky  21:10

That's, that's really exciting. Congratulations for that. Because I go back a few years ago, as you know, I just left one of the largest firms in the country five minutes ago that I won't mention and even five years ago, you would have never seen something like that on their investment platform. So that says a lot about and that was the genesis of my question. How prevalent Are we becoming? And where do I imagine where you hope to see yourself five years from now too.

Luke Oliver  21:34

So what I tell people, and it's eight is the same thing. I told people 10 years ago, when we launched the first currency hedge, hedged ETFs, at my former firm, was that you tell the story, we told the currency story, and we're telling the carbon story today. And people would say, Yeah, but you know what, I've lived without this for 20 years, why do I need this now. And I say to them, unfortunately, you don't have the luxury to think that you're already in the carbon markets, every stock you hold, is either paying this price of carbon already, and is exposed to it rising, so you're on the short end, or they've made commitments to decarbonize. And so you are inherently short, carbon transition, you have that risk. Now, you will have some companies that innovate and have successes. So keep your equities diversified, stay in those energy names, because those are some of the biggest spenders in this area. So so don't make any rash decisions with your equities. But know that you're sort of short carbon. So if you like what I'm saying, you don't get to choose to save your sounds good. But I don't want to add that you're in it, but you're short. And so we've kind of done a back of an envelope that if you take the carbon footprint of the S&P 500, of the emerging market benchmark, you sort of need about four or 5%, give or take allocation to carbon to kind of neutralize that. Now, it's not perfect, right? Because, you know, the company, not in one of these markets doesn't have to pay these particular prices. But just generally carbon footprint divided by sort of a global price of carbon puts you in that sort of four to 5%. So you really should be looking at this and I see this, and I think this is your audience, guys, this is a way for an investor to make an allocation and that sort of four or 5% space that has incredibly low correlations. It has an above average expected return, based on everything that I'm going to walk walk us through in a second. And it does have higher volatility, but because of that low correlation, it actually brings down the volatility of the portfolio. So to your question, can we just use like a tip 5% 10%. And in every scenario where we put put carbon in, we shift that curve, the you know, the efficient frontier out into the left. And then when we compare it to a commodities, it's actually significantly better, because obviously, over time, commodities don't really give you a return that inflation protectors, they move in cycles. We are on one big cycle. So it's pretty exciting. So so we think put it in wherever you have thematic, you can use it as somebody who uses an inflation hedge because the design of the programs, especially California is to ensure that it moves by 5%. It has a 5% plus CPI adjustment every single year. So it's got an explicit inflation hedge built into it. So we see that and then so where you have alternatives where you have thematic, and then I also like this idea kind of touching on we hear this less, but we're hearing it more and more is people thinking about this as an overlay on their equities as this sort of hedge. So I don't want to sell energy companies because they're polluters, I do want to sell them because they're polluters, but I know that's not a wise investment decision. So how do I do that? Could a carbon overlay and you can do that with these ETFs you know, KR bn is our global. It's got all four markets in it and then we have a Europe only ke UA and a California only kcca but it's definitely The, you know, statistically based on historical numbers is very additive to a portfolio because I said correlation to equities about point three, volatility about double that of equities. But as I've said, it's it actually smooths out your volatility at a portfolio level. And then in terms of returns, the returns have been very strong since inception in krB, in figures returned about 20% a year. That's the IRR, give or take it is but what we expect going forward? I'll give you some numbers.

Clint Sorenson  25:30

Do you want me to throw up the pricing model? Yeah,

Paul Barausky  25:32

This is so fascinating to me, I'm putting us so Luke, I always say I was in the half of the class that made the top half possible. I never thought I'd get this far in my career where I'd be thinking allocations to carve and where does it fit in an overall structure and a portfolio. So, really appreciate you sharing this information today. It's quite unique.

Luke Oliver  25:52

Thank you so much for having me on. I mean, this is, I mean, you can tell I love talking about this. And it is fascinating. I mean, electric cars and microchips and carbon, the big topics of discussion at the moment, it's, well the way from where we were 20 years ago, but I'm, so what this shows is, this is the European market. And we have, so I'm gonna go back just one step, European carbon is currently trading at about 62 euros per ton. For prior to the Ukraine invasion, it was trading at 80 to 100. So we've had this incredible return. But we've really pulled back, all of the forecasts get you into the 120 140 by 2030. California, on the other hand, is trading about 4039 $40 a ton. And all the forecasts by 2030 are around $100 a ton. So both of these markets have a two or 3x. Between now and 2030. According to most forecasts, our forecasts and our research, say something very similar. And this is why, and I mentioned the beginning, there are people treating this more short term. And then there are the long term investors and the rewards here are for the long term investor who can wait doesn't mind a bit of volatility on the way, as I said, because the correlations are low, it actually doesn't feel that volatile in your portfolio, there are those incredible potential upsides that I'm talking about. So listen, just look at that, check this out, right? So the purple line, the top line, is then reducing the cap, that's the cap going down. So that is your sort of tightening policy. The black line is the surplus in the market. So you remember I said the way they work is they auction more than they need, and then they tighten the screws until they get to their target. And eventually, the market will either buy them at the auction, or they will use their hedges or their inventory. And it's only when that inventory starts getting tight, the rubber hits the road and the price starts to move. So what what happened here, and I know this might be a little technical, but I think anyone who sort of thinks about pricing, and I think this will be intuitive. So if you look at the black line, the black line was reducing. And it was previously more like the dotted line, it was more linear, sloped down. And that's why we saw prices going up. And that's why we see the price ultimately, as you see by 2030, that surplus is almost gone, if not completely gone by 2030. So we are going to see an incredible tightening in the price between now and 2030. However, because of the Ukraine invasion, the it was a very good policy, and it shouldn't have really done much to the price because they got it right. But of course short term traders and long term investors approach this very differently. So what happened was, they front loaded the auctions, they said in 2023 24, and 25 will auction an extra 6%, give or take. And then in years 27–26 27 and 28 will auction six to 8% less to account for that. So with theory that was totally neutral. But what that look like if you're a short term investor or trader in these markets is you would say well, that means instead of that linear line of tightening, it actually flattens in the first three years and then double tightens in the second three years. And so as a financial investor, we said that this is not news. The net of this is essentially the same thing. We're very happy being long. And we have I don't know if it's the slide prior or if we even have it in the slides. But there's the long's and shorts and maybe I didn't know. So we can go back there was basically all the long holders stayed long. But all the short term traders that flip long and short have all gone short, and the market net went short in the futures. And so in this flattening that you can see in the circle, instead of the market slowing down, it's rally, it actually sold off, and it's kind of logical. For some of us if you think about sort of technicals that this is we flattened relative to expectations therefore Are we sold off, but it's not entirely rational for something as long term as carbon. So we've been in this sell off. So all of that is to say, while we're in that circle, we have an incredible buying opportunity. Everyone that is short, this market in the futures, they believe that we're going 100% up soon as this blind rolls over, but they're just positioning short term, they're trying to make a buck on the downside. And then they're going to flip to long. We think this is the place just to be long, let that volatility happen. And just take this upside. So right now, we've seen the market sell off that if we go to the next slide, so you can see here, it rolls over at the end of this year. Here, all of these forecasts have not changed. All of these analysts, ourselves included, put the 2020 30 price at well over 100. You can see there 146 euros from Macquarie ISIS 100 644 Energy aspects, even higher from vape. All of these guys see this price significantly higher today, you can buy it at 62 euros, and we think that it's going to price in sooner rather than later. So we were very bullish at 90, because we saw it going to 150. We're now then at 6260 to 250, is very compelling. Now, some people will say, Well, is there a way to de risk this further? Well, yeah, you can combine a bunch of different versions of this story that don't correlate with each other, and make that even more robust. So right now we see, I mean, even if you look at Macquarie, they think by the end of 2025, it'll be 93 euros. In fact, all of those numbers, which is 7776 91, we're trading at 62 right now. So they see a lot of this return happening in the next year, we're saying the same thing we're saying that we're talking about the next six to 18 months is when we're going to see this get back into the 82 to 100 range, and then onwards to 2030. On these higher numbers. So you know, more than based on these numbers from the 62 euros today, you know, you've got more than 100% upside on most of these forecasts between now and 2030. California is really interesting.

Clint Sorenson  32:07

So what about these other markets? Right, so that was your What about this one on California? 

Luke Oliver  32:12

Yeah, yeah, California and some of the Canadian programs that are intertwined. This one is even cleaner. The Pope Saint purple line shows the tightening, it gets a little steeper after 2024, because of the new tightening measures that they've announced. And you can see that surplus Europe, surplus has always been trending down. It's just whether it's trending down fast enough. California has has been growing. And we're at the inflection point where from this year on, it's no longer growing, it's tightening. And that's why California was up 34% last year, because the market finally said we're rolling over.

Clint Sorenson  32:46

So that goes to your point, Luke, about having multiple of these in a portfolio, right? Because you just talked about Europe, you know, not going up last year actually going down. Whereas as 

Paul Barausky  32:57

smoothing out the lines, has a diversification play?

Luke Oliver  33:03

Classic. Yeah, classic diversification. And then there's–we have four markets now, Europe and California really drive we're sort of 60% Europe 30% this market, but we have a fund just for Europe. And we have a fund just for this as well. So a lot of people are buying the global and then adding some extra California that's that's kind of 

Paul Barausky  33:22

Yeah, and then you can see you can overweight, so you can buy a diversified portfolio and that take the market, you'd like an overweight that individual one.

Luke Oliver  33:29

Correct. And it's been quite popular. And that's why we're actually seeing, we used to be predominantly in the global. And now we're seeing the Global's come down and we've seen a little message go into the into the California.

Paul Barausky  33:39

Couple of random questions from man Clint knows I always have these oddball ones, the hamsters are running in the wheel. Personally, or as a company, do you have an outlook on cheap nuclear power?

Luke Oliver  33:51

No, is the short answer. I'd love to I'd love to I'd love to get into it a little more. I mean, there's so much political baggage around that. The argument is that as this price rises, you get even more investment into Fusion. You get

Paul Barausky  34:06

That's why I was asking that you read my mind? Yeah.

Luke Oliver  34:09

I kind of joke sometimes, you know, again, this is when I'm trying to get people sort of off the, you know, left liberal program, not–

Paul Barausky  34:20

This is the tree hugging fight. Yeah, yeah.

Luke Oliver  34:23

When I'm trying to convince people, it's, it's not that I say, Look, we all want energy. We all want everything that we have, and we want it to be cheap. And we still out there burning coal, these rocks that we dig out of the ground, like what are we thinking? Like? That's all it is, like, why did we, you know, and again, I don't want to offend anyone in Pennsylvania, you know, Lancaster County or wherever it is, but like, you know, the Amish for some reason picked some year in the 1800s. And that's it. That's where that's where they're going to live. Why did we decide that we're going to live with coal and oil and gas and like that ignore all the other technology that we've invented. we've invented scale we've invented. Think about it, right? We've got nuclear, we've got solar, wind, we've got geothermal, we've got hydro, the list goes on, we've invented them. But they're not scaled, right? yet. We haven't yet scaled them with the right investment. And you could argue lots of reasons why that is, but putting a price on carbon. And then creating government's incentive spending incentives is we're going to find out, we're going to find out which one of these is the one that can be scaled to be cheap coal and gas. And then once that happens, and you know, ceraweek was in Texas a couple of weeks ago, it used to be, you know, the Energy Conference. Now it's the Energy Transition Conference, all the energy companies are on board with this, that we don't have to worry about the energy companies, they're going to be fine that this is their time to shine. And so we're going to find out which one of these technologies scales fastest and best, and it's gonna be the one we're going to use. And that's it. And it might be a combination of three or four of them.

Clint Sorenson  35:57

Alright, so in our last few minutes, Luke, let's sum up–the fat pitch is obviously carbon markets, but how would you advise our audience to take advantage of the opportunity today? And why now? Right?

Paul Barausky  36:07

In other words, what's the fat pitch?

Luke Oliver  36:09

Here's the fat pitch. And before I before I know, what's the five that give you that, just look at this chart, this is the California market. With the little squiggly line at the bottom there, not the very bottom, the one in the sort of between the blue and the orange line, the current price is trading at $40 a ton. The bottom line is the market floor. If it trades below there, they stop auctions. So the supply disappears. If it goes below there, therefore it never traded can't trade below there. So that's your floor by 2030. And remember, all of these lines go up by CPI plus five. So that bottom line goes up to about 39 by 2030. And when you buy it, today, you're buying at 40. So if you're holding between now and 2030, your downside is almost completely protected by that market. The orange line is actually where it should be trading today. Because if you remember on that curve I showed earlier, the surplus runs out by 2029. So we're going to have to train at the first liquidity tier, that first liquidity tier is at $56 today, and will be at $88 by 2030. The market forecasts then that today that $40 investment should be at 56 cents 35% Right there. And then by 2040, most market participants think that we will exhaust the first liquidity tier and be at the second liquidity to, which is the yellow line, which is trading at about 115 Where 2030. And then even California, the state of California who run the program are expecting by 2035, it should be 145. My personal forecast is that chart on the left. And by 2030, I think it'll be 150. So a little bit different, I think $150 by 2030, or just thereafter, California State of California says 145 by 2035. So not that different. But again, the run that we're going to have from today to 2030 is going to be the lion's share. That's the exciting part of this. So the fat pitch is that you should be adding carbon to your portfolio carbon compliance. And the very simple way to do that is to use one of our ETFs krB. N is our global blended 60% of Europe, 30% California 5% Each UK and northeast us. And with that, you get a point three, which is very low correlation to equities, you get an expected return that we've just talked about, that could be well over 100 to 200% Between now and 2030. And you also if it's something you're interested in, you're actually creating the price discovery that is going to be one of the biggest catalysts for innovation and investment in clean technology. So really, this is something that gives you everything that you would like from an alternative investment, while also being arguably the purest play on having impact. 

Paul Barausky  39:07

I love it. It's a very different way of looking at things. And I think with all of the backlash on ESG or green investing recently. I mean, I heard it a couple of years ago at University of Chicago about do you want to pay a green tax for your investment return? It's depends how much and I said I hate UBTI– I might hate the green tax more. So this was really enlightening for me, Clint, you probably you've known Luke a while, anything do take us out here?

Clint Sorenson  39:35

No, thank you. I know our audience is gonna really appreciate this and how can people get in touch with you Luke? 

Luke Oliver  39:43

It's Luke a for Anthony Oliver. And also Kraneshares.com You'll find us there info@kraneshares.com or Luke dot Oliver @ crane shares.com. Please, please look us up and we go through–

Paul Barausky  39:58

One last one last question before we go, knows I get really intellectually curious about new subjects, is there some place. Maybe you link to him a lot on Twitter. But if somebody wants to learn more about this is like following your Twitter a good way is sometimes linked to articles. Are there other publications or sites that you look at in this area? 

Luke Oliver  40:18

Yeah, and I’ll get better to Twitter, I promise. But we write a blog every single week. And you write an article every month and every quarter, we put out a complete quarterly report on this market. No one puts out more on this then than we do. 

Paul Barausky  40:31

That's fantastic. Because Clint, or Luke, you said it earlier, I think about the burgeoning RIA space, there was nothing so I think advisors that watch us or that we talked to investors. Thanks for that. Your blog is probably a great place for info so very much appreciate your very different fat pitch than most things we heard. And I'm going to ask one non financial question before we go. Are you gonna like me when this is over, turn on the Arsenal Champions League match and cheer for my gunners?

Luke Oliver  41:02

Sadly, no, I grew up in Chelsea as a kid. And they were, they were terrible. And they got pretty good. And it was kind of a phony because they, 

Paul Barausky  41:12

Well, they got very rich for the Abramowicz 

Luke Oliver  41:15

They got very rich, and then and then now they're not so good anymore. What do we tenth or eighth? So I'm not it's not my, it's not my thing, but

Paul Barausky  41:22

Not your cup of tea. Now, you all know what I'm gonna do when we end this podcast. So by the time people listen to it, hopefully I'll be Happy Paul. {Oh, it's on right now?} Yes, it's on right now. But very shortly, just right now. But listen on behalf of Clint and myself. Thanks, everybody. Luke, we can't thank you enough for joining us today. Absolutely fantastic information and very exciting to learn more about. So Thanks, all. 

Luke Oliver

Thanks, Paul. Thanks, Clint. 

Thanks, guys.