The Hidden Asset Class Beating Stocks? Carbon Credits Explained

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Transcript

Why Advisors Need True Alts

SPEAKER_00 0:10

If you are an advisor and you're over the CE credits, uh, I will uh now that I've gotten very good at AI, I'm going to uh uh automatically submit those uh with some agentic bots I've been setting up this past weekend. So I will email you, or maybe my bot assistants will email you uh at the end of this presentation uh to get your information and then I'll get that submitted at ASAP. Uh I have been having a lot of fun creating some agentic AI bots. Uh but you the only thing that's more fun than doing agentic uh AI bots to do various things is listening to Luke Oliver. Uh that's that's the one thing that's a little bit more fun. Let's talk a little bit about crane shares because this webinar is sponsored by you guys. Uh you've got a whole bunch of different funds, but this is uh you're gonna be talking about a certain theme within the fun lineup, which is a little bit different.

SPEAKER_01 0:55

It is, it is, and and it's different, but there's something about it that we're all familiar with, which is we're all watching stocks, we're all watching what the dollar's doing. We've seen uh the international looks interesting relative to US, but at the same time, do we really want to be in those those markets? And um what we're gonna talk about today is something that's had and maintained a 0.3 correlation to US equities with a very similar sharp to equities. And so what I'm looking for, I'm sure a lot of your advisors are looking for, is are true alts. We've also seen a lot of folks, you know, including us, putting, you know, uh giving you know increased access to private equity uh through the ETF wrapper. And but of course, when you make you know public uh private stocks public and you expose them to liquidity, they start to price like public equities. And so they kind of cease to be um alternatives in in the same sense that they used to be. So what we're gonna talk about today is something I think is arguably um the ideal alternative in that it's got very low correlation and it's got a high, high sharp.

What Compliance Carbon Really Is

SPEAKER_00 2:06

And I I think you never want to use the the word guaranteed in our business, but uh almost almost close to guaranteed in terms of sort of the interesting supply and demand dynamics, which we'll touch on when it comes to the government credit space. Um again, folks, if you're ever to see credits, I will email you afterwards just to the end of the presentation. Hopefully the presentation now is loaded. Is that is that fair to say on your side? I think so. It looks like it. There we go. Okay. So uh click share screen, folks. Uh you're gonna find this to be to be interesting, I promise you. It's a part of the investable landscape, which not too many people are aware of, but certainly uh makes a lot of sense from a portfolio construction perspective and the storyline carbon credits, independent, by the way, of anybody's views on whether uh carbon credits or or oil are political or not, it's a it's an interesting space to look at. So I'll let Luke uh go from here once he clicks share screen.

Offsets Versus Regulated Allowances

Supply Tightening Drives The Market

SPEAKER_01 2:49

Michael, thanks for having me. Yeah, we will so um it's interesting, guaranteed. Of course, you know, my compliance uh won't ever let me say that. And of course, you know, when you get something with attractive returns, you often have to accept higher volatility. And certainly um carbon as a as a as a global asset class is um not low vol any um stretch of the imagination. But Ukraine shares, we've we've probably had one of the longest histories in this this carbon space. We launched this fund almost six years ago and um our global fund, and we've we've seen um you know fantastic returns over that six years. What people will be really sort of blown away by when I, you know, of course, I start talking about carbon. Some of your listeners may think, shh, I haven't heard of it and I've survived without it. Why do I need to know about this now? They may also think this sounds like something uh green and I don't think we're doing green stuff anymore. Or valid points. What you'll be surprised to know is that the global basket of compliance carbon. So what this means is not we're not talking about trees, we're not talking about uh forestry projects or or um you know windmills or anything green per se. What we're talking about is the regulated price of carbon in various economies. And you can imagine um Europe is a big player in this, the state of California, the state of Washington, the northeast of the US has a whole carbon program. And what it what it is is that certain industries have to trade essentially in carbon permits. And that trade in carbon permits is keyed into a financial market. Because, of course, as we know, most of us are capitalists. We know that the most efficient way to catalyze change is to is to make it an echo make it economical. And so um we've seen that um these carbon prices have beat over the first five years of our fund up until the end of last year, had outperformed US equities. And we were actually comfortable with uh with gold returns, believe it or not, and did so with a 0.3 correlation. So we actually just put out a paper that's uh we haven't blasted it out yet to clients, but we just put it on the website where um we talk about this, the fact that we've seen so many people moving towards gold and looking for what gold has done, which is which is really truly um perform relative to inflation and have low correlation to equities, and it has done an incredible job. And yet we've obviously had some sell-off in gold, but gold had been pushing, you know, historical all-time highs, even in in you know, inflation-adjusted terms. And so what do you do when you've got your fill of equities, you've got your fill of gold, you're worried about um, you know, uh the dollar depreciation, which is not a bad thing. It's probably it'll I think will be um, you know, you know, engineered that way to be economically supportive. But how do you, what can you own that will move differently to all of those things and yet should have um you know a real return that that is attractive? And that's where carbon has come in. It truly has done that. And you can see here um we've maintained that 0.3 correlation to US large cap and have actually, you know, in the first five years of our funds, I think we're neck and neck. In fact, um, you know, after today and after the last month or so, um it I'll have to see, you know, where where we where we come out. But we're probably just in line with US equities over the last five years, which I think you'll all agree is a great return. And if you can do something that does it with low correlation, even better. Um, and also don't just take my word for it. I mean, we've the CFE Institute has written three papers uh in 2025, and they've scheduled to write two more in 2026 talking about exactly this market. And remember, this is not really a niche market, this is a trillion-dollar market. Every major economy in the world has some form of pricing mechanism for um emissions. And that is um, you know, whether that is is you know, China, um, India has a program that they're developing, um, Australia and New Zealand have a very developed market, um, South Korea has a very developed market, and and what we track are the largest which is the UK, UK to Europe, and um, as well as the state of Washington and the northeast of the US. Um, Cambridge Associates, the the consultant has put out a a paper on the California carbon market to investors, which I think you'll find quite interesting, which is where we talk about this floor rising floor price, as well as um the the the guy that invented uh uh the the futures market, which actually solved the acid rain problem in the 70s and 80s, has actually just written a book on uh on carbon markets, and you'll see we you know we get mentioned actually in there for bringing these these markets um to investors. So um just a very quick distinction. Some of you may have heard about carbon markets. I'm not talking about um carbon offsets. This is where companies commit to be to green their their industry by buying um offsets, i.e. carbon projects, whether that's forestry or carbon capture. We're not involved in anything voluntary. Um interesting market, very impactful, arguably. However, there's not really any real, unfortunately, um economics there. There's no true measure of supply and there's no real true measure of demand. So very difficult to have price discovery. Where we operate is this trillion dollar market here on the left side of the screen where um e where these are government-backed programs, it is government-issued paper, and there is an intrinsic value to each carbon allowance or carbon credit, which is tied to the the utility of putting one ton of uh emissions into the environment. So if you're a um uh a car manufacturer, you know that by producing a car, you're gonna put a certain number of tons of CO2 into the atmosphere. And so you price in the cost of these allowances alongside that. And what that does is is create this very unique system where companies will naturally decarbonize and reduce the carbon and methane and other emissions from from their from their industry, but by doing it by by by by being catalyzed by this increasing price of carbon. So the carbon markets are actually engineered to have a tightening supply curve. Another uh alternative that people may be thinking of when I talk about tapering supply would be would be Bitcoin. The difference between uh something like this and Bitcoin, Bitcoin, you know, different correlation. I don't know about low correlation, but different correlation. And people have very high high return expectations. But still, the Bitcoin itself, its only utility is a transfer of power. The utility of a carbon allowance is actually, you can see some of the bigger name companies that are in these markets, they need to trade in these allowances in order to run their businesses. So there is a true intrinsic demand-supply uh driven uh price discovery mechanism. So the idea is that these prices are slowly engineered higher. As they're engineered higher, the companies within those economies will shift their um processes to lower carbon emissions, but also innovate so that the emissions actually become cheaper to abate and we get new technology that requires either uses energy more efficiently, um, repurposes heat and uh other outputs, or simply just brand new technologies like you know, in the battery storage space, or a nuclear renaissance. And so you can see that the markets keep expanding globally, and this is where the magic happens. You have an auction revenue by selling them, you have fuel switching, which by putting any price into an emission, you suddenly make the dirtier fuels more expensive and the cleaner fuels cheaper. So you get a natural migration away uh towards that cleaner fuel. And again, some people think of this as what is this is this um bad for business? What it's really doing is creating huge catalysts for expenditure in moving to cleaner, cleaner fuel. So the idea is to have not have less energy or less less output, but to uh re-engineer how we get that output um with with lower carbon concentrations and methane concentrations. And this is where that third box comes in is that by putting a price on carbon, you create a financial incentive for innovation. And we see this in the economies that have the strongest carbon market. We see the fastest um the fastest innovation or fastest migration to and scaling of uh better technologies. And of course, there are just some examples there, but very clearly our power consumption as a planet is growing exponentially, whether it's AI, um, you know, more and more people getting onto the grid, more and more people having cell phones, you name it, we're exponentially increasing our energy usage. And so to belong that increase in energy usage, you could belong arguably coal and oil and gas and the things, or uh, or even solar panels, right? And and wind and all the other technologies. But what you can, the problem with a lot of those investments is that there are winners and losers. The commodities themselves, like like the fossil fuels, are very expensive to be long because they they require physical storage or physical transport. Carbon is almost exactly like a financial asset. And so you are able to be long the commodity of the energy transition. And the energy transition is happening. And I'm not saying that as a green uh or an impact person or a sustainability person, just purely as a pragmatist, that we are going to need more energy, we're going to need it from more sources, and it just isn't actually sustainable to keep uh producing that from coal. And so we're going to have to shift. And this is the mechanism through which most developed economies are creating that that transition. And you get to belong that market. So Goldman is, you know, and this is again not just me saying this or Cambridge or the CFA Institute, but every major bank on the street has a has a desk. Goldman puts out um this thick report every year. I always go back to this uh page from 2023. I should have my guys update this to a newer version of it, but essentially this is called the marginal abatement cost curve. And this is where the price of carbon will increase as we move up the curve and move over time. And essentially they see that the price of carbon could arguably be as high as$1,400. Now, to put that into context, it's trading around$40 a ton now. I don't think it's moving to$1,400 because what I think happens is as that price rises, there will be so much uh capital moving into innovating away from avoiding, even at$200 a ton, that will be so expensive that there'll be so much innovation and investment in reducing um emissions in industry that we will bring down and scale that technology. So the sweet spot for me is investing in something in the$40 range that moves over the next sort of 10 years to that$200 range, and then we have an incredible return, and we will have decarbonized a lot of the economy without reducing quality of life, um, output and production. And so this really is um, you know, it's it's the invisible hand, if you like, um, of markets that will shift us towards reducing emissions while not hampering um business. So I could go on and on about all the various um you know factors. These are the five big markets that that we that we that we track, and we provide exposure to all five of these blended in one ETF. And then we have a separate ETF for the two biggest markets, which is Europe and California. So we have three ETFs providing um uh this exposure. Now, I could go on, and Michael, please jump in if if there's any sort of questions along the way or anyone's flagging anything to you. But what I probably would do next is jump into a couple of the markets and why you should uh consider being being along this market alongside your you know your more your traditional portfolio.

SPEAKER_00 15:59

And by the way, before you do that, um Luke, maybe get into um how much of a challenge this was for Crane Shares to actually target this part of the marketplace, right? Because it's it's not really that accessible, but you've made it accessible in ETFs.

Sizing Allocations And Asymmetry

Europe Supply Shock After Ukraine

California Reserve Price And Reform

Why Carbon Beats Commodity Carry Costs

Tickers And Where To Start

SPEAKER_01 16:12

We've made it accessible, and and that's what we do, and you know, ETFs in general do that. But to to structure an ETF, even with the amount of innovation in the ETF space already, um at Crane Shares, we had to uh build the index. We had to work with S ⁇ P. So they this is you know, the same same guys that run the S ⁇ P 500 run the index on on um for the for the carbon markets. And we worked with them to build that that methodology. We had to build a structure that could hold the the uh five futures that are in this market. And it was, yeah, it was a it was a first, it was a first to market, um, very tricky, you know, couple of years in RD before we we could we could get it to market. But it's been you know a highly, highly successful product. And since we launched it, the returns have been something like double the equity returns. Um, or should I say they were uh sorry, let me take that back because that's that will get me in trouble. Since 2014, when these markets kind of reached a peak of liquidity that you could start tracking them in an index, their return has been about double that of equities, but with about double the risk. So the sharp was comparable. And that's where I was talking about similar sharps, 0.3 correlation. You've got something very, very attractive. Um, in the five years since we've launched, have been one of the strongest runs in US equities, and carbon has kept up on an annualized basis with the S P 500. So we felt so strongly that this the market needed access to this asset class. To date, institutions have been tapping this market, but they haven't been available to advisors. And we've seen a lot of advisors using this. We'd love to see them using, you know, six, six, seven, eight percent allocation. Realistically, what we've seen is folks using something like a two or three percent allocation. And what that does is one, if it doesn't um, because these these markets are designed to rise in real terms, when they don't perform, they're probably gonna track something like a floor price, and I'll explain that in a little bit. Um and when they perform, they can perform very well. So it's a little bit of an asymmetric, you know, have a small allocation when it when it when it uh performs, it's great. When it doesn't perform, it's not too much um uh of a drag. But when you get these these markets starting to mature, as they have done, we start to see this being sort of a comparable, you know, comparable return to US equities, like long-term US equities, but with that low, low correlation. I keep kind of hitting on that point, but this is why we wanted to bring the product to market and we spent so long um bringing it, is because it was it was simply um what we felt the market needed was a true alternative. And the only way to get a true alternative is to get something that has completely different um drivers. And of course, everything's to do with supply and demand. But the supply and demand here is the demand for these credits is industry, and the supply of these credits is based on policy. So you can imagine the demand can move a little bit with the overall economy, but the supply is mandated by, and I'll show you here what that looks like on a uh on a on a diagram. The European Union, for example, mandates that the new supply to market falls every year. That's what the purple line is. The black line is the net surplus in the market. So everything that has been issued to market and everything that has been used by the market. And so you want to see the purple line falling, which by design it always will, but you also want to see the net supply falling. Because if companies were reducing their emissions, or we were having a massive recession that reduced emissions, even though less were being issued, they might be consuming even less than that. And you would actually see a rise. You can see 2020, during the pandemic, pollution ground to a halt for several months during the pandemic. And so the black line went up. Even though the purple line was still going down, the black line went up because um demand dropped faster than supply dropped. And so those are the sorts of things that cause volatility in this market. And you can imagine um natural gas prices spike. It can help or hurt the price of carbon, believe it or not. Um, when you see um, you know, days where the classic example, you see bad weather in Europe and they their solar panels and wind um are not capturing as much energy as as they would like. They'll have to burn more coal, and therefore they'll have higher emissions, and the price of carbon will go up. So this really is a way to belong this transition period that that the global economy is in. Massive growth in energy and massive transition of where that energy is being sourced from. The only sort of pure play on that is to belong the the carbon, if you like. That's the currency of the transition. So um, what makes Europe so interesting right now? You see, I've drawn a blue circle there. Well, the black line had flattened a little bit because of the invasion of the Ukraine. So with the Ukraine invasion, we'd seen this whole um this market essentially front-loaded. You can imagine how disruptive the Ukraine invasion was to the gas supply from Russia into Europe. And uh, you know, very, very well um publicized. And you probably all understand that Europe had to switch away from its dependence on Russian gas to other sources of natural gas. And so in that transition, they eased this market. So it was one of the rare times where this market that is on a single cycle out to 2050 actually eased a little bit and they front-loaded auctions. So, what that meant was that the years 2022, 2023, and 2024 had a flatter uh surplus depletion, followed by the next three years where it'll be steeper. And so it's this next three years where we think we'll start to see prices lifting up. Now, that said, this is a little bit like when I say the currency of the energy transition, in the same way that the Fed is going to look at rates, so does the European Commission, look at the supply of these credits. And so if the market gets too hot, they may ease off on it. If the market gets too cheap, they may tighten up. And so we get this kind of regime where we're on a single tightening on the long term, but we'll have um some shifts in intra intra-period, which is also where the low correlation comes from. So these these numbers are a little bit fluid, but you can see here that some of the forecasts on European carbon are significant. You know, today we're trading somewhere in the 70 uh euro mark, and yet you can see some of these forecasts even for this year are to end significantly higher. Now we'll see because you know, with with um you know gas prices being higher, with unrest in the Middle East, which could disrupt energy supply, they may cool off a little bit around these markets. So returns might not be on track for you know, you know, 170 by 2028. That seems uh on the more aggressive end given the context of of where we are. But that would be extraordinary returns. What we would expect in these markets, sort of as a minimum, is that you would be in this real um, you know, inflation plus environment. And I think um, when I say inflation plus, explicitly in the California market, inflation plus 5% as the minimum step up in that, in that market. So Europe is the by far the biggest market, some of the more aggressive targets on price. Um, I think some of those are probably moderated given the turt turmoil in the Middle East uh is ongoing, as well as um, you know, we still have we still have the Ukraine issue. Um, so some of these might be on the aggressive side, but you can tell just from these numbers that this is a very positive sort of uptrend given that the market is really tightening up that that supply. Now, California is something that I think a lot of folks are really interested in. We've just had a policy extension, extending this to 2045 from 2030. So a lot more time value built into this um this strategy. Um, and what we've seen is that we just hit peak. So remember the black line is the surplus or the deficit in the in aggregate. The purple line is new supply every year. So supply is falling, great, but the black line is only just starting to fall. We're rolling over from growing surplus to shrinking surplus. And this is where we really get liftoff in prices. And California is probably even more so, even though Europe is actually a bigger market than the California market. California gets a lot of attention for this reason. One, we're rolling over into tighter markets. Two, the policy extension and the policy um reform is going through at the moment. A lot of folks are just waiting to see this pass, um uh um get all the way through the process, which started mid-January. It's a 45-day process, and then about another month before the board approves, and then the governor's signature. So this could get us through so sort of, you know, early, early to mid mid-summer by the time the process goes through, but the market is beginning to is is beginning to price that that in. But this is what so not only the things I said hopefully um sound as positive to you as as they are, but there's a there's a kicker with California, which is it also has a flaw price. And we are trading at the floor price give or take today. So the program has a flaw price. And when I say I've got to be careful when I say flaw price, it's not technically a flaw price. However, what it is is there is an or the these credits are auctioned to market and issued out to market. And when they are issued, they cannot be sold or issued below a certain price. So what happens is if the secondary market ever trades below, it almost always snaps back because you can simply go short the auction price and go long the secondary market that's trading below that. And so we're people are always arbitraging that. And even in the, you know, at the extremes, when we've seen extreme volatility, this floor price has held. Yes, trades are printed, you know, below on occasion in small size, but the market always ARBs back to that floor. So um we'll call it a reserve price instead of a floor, but we are trading at that reserve now. And that reserve goes up by 5% plus CPI. So it just lifted 8% last year. We think it will lift another 8% this year. We model inflation starts to come down eventually. But if you look at that blue line, just that blue line, even though we've you know taken this out to 2045, it doesn't look like a very steep line. But it's a if if you take that um CPI plus five every year and discount that back to today, it would almost imply an intrinsic value today of about$44. And yet we're trading at about 30. So um trades at trading close to the reserve price, the reserve price goes up CPI plus five. So if that alone, so for an endowment, something with a low correlation that has a 5% over inflation um step up, that alone becomes quite attractive. And that's just relative to the floor. If we get the reforms, if we get this, the new reform signed into law, we actually should start seeing the effects of this tightening supply. And as the price moves higher, um, the next target becomes that orange line, which is the first, they call it um the containment reserve where they will sell extra credits. And so those lines offer resistance. So the the program operates almost like a corridor. It's quite, there's incredibly strong support at the blue line, and there's resistance at those orange lines and yellow lines. And so that said, the orange line is is at 64 today. And so there's more than 100% upside up to that line. Our view is if I combine the two charts, is that we have downside protection on uh right where our entry point is today. We see the surplus being depleted by the early 2030s, 2031, 2032, which means the market will need extra supply, which it will have to get from this orange line. And so by 2031-2032, we should be converging towards that orange line. And of course, in a financial market, once the market is able to model that that is the outcome, we will trade today at a discounted version of that of that price. And so we should see the pricing for that um happening much sooner than 2031. And so if you look at something that you can buy at 30, you could argue it has an intrinsic value that is closer to 44, and you've got a price target by 2032 closer to 90 to$100. I think you can see why this has been so attractive to institutions looking uh for an alternative um allocation, and especially um something else that's worth poking. And here are the three other markets, but I won't dwell on them so much, but they all have the same steeply falling black line characteristic, which is what drives prices higher. But I do want to show you this, the market continues to grow. Um, I want to show you that the correlation is low. I want to show you that the correlation between the pieces in this portfolio are very low. Um, and here's where we take sort of the long-term uh sharp ratio of carbon allowances versus equities. And you'll see there's a pretty solid uh sharp ratio, especially when you you do it with this correlation. But I also wanted to show you this, which is when you this trade or this position is arguably a proxy for um the commodities being used for energy. And so a lot of folks might say, well, yeah, this is why I want to be long natural gas. You pretty much can't be long natural gas. It's not an effective way, um, or it's certainly not an investment. If you're long natural gas, you have huge volatility and you also have this very awkward curve shape, which makes it very expensive to belong the commodity. So, you know, you you may have heard the term, and certainly I used to run commodity funds in a former life about 15 years ago, um, give or take, where Contango, the shape of the curve, was incredibly expensive. And that's what made being long oil or long gas impossible. Even if you were right and gas went up 30%, it might have cost you 25% to be long. And so, uh and and I saw worse scenarios where people were right but were still that still lost money. And so carbon, because there is no bulky commodity to be held or transferred, these are electronically moved like US dollars, then there's very little friction in the trade. And therefore, buying and holding these credits is relatively cheap. So our futures curve here looks very much like a um a currency curve, i.e., the interest rate differential. So in in um, so these curves have something like 450 basis points in the curve. We buy the future, and then we and you only put up a small amount of margin, and then we invest in treasuries or ultra short, ultra high quality um fixed income to earn back that curve. So our net cost is somewhere in the 100 basis points on the curve, not the 450, and certainly not the double-digit um cost to carry that you would get in a in a traditional bulky um commodity. And for that reason, carbon as a long-term investment versus a commodity, especially when we are what I'm saying is we're essentially the proxy for um uh natural gas as we as we transition, as natural gas becomes that that kind of core transition fuel, you'll see that in a portfolio, the diversification benefits between commodities, which are a great diversifier, and carbon really start to separate. Because while both do a good job of diversification, one of them is incredibly expensive to hold long term. One of them is like a financial asset, which is carbon. And that's why when we plot this, you know, an efficient frontier, the carbon will push us out to the left, up and to the left where we want to be, whereas the commodities will actually, uh a long only strategy and commodities will actually bring you inside the curve, which you do not want. And so um, I think especially as we go through this newer phase of increased volatility, less certainty on what you know US returns will look like. And even, you know, I think we'll still have great returns, but they'll start to look and feel a bit more um, they'll feel different relative to inflation, whereas carbon actually has, in in most cases, inflation built into the actual system, but they need to rise in return. So that becomes very attractive. So maybe I'll pause there and um see if I can leave you with um with the with the tickers here. KRBN is the global fund and that holds all the major markets. KEUA is the European only, and KCCA, which has been incredibly popular, is the California only. And I and I think when you've talked about um I I'll I'll I'll leave this this the slides here in case we need to kind of move through them, but I'll I'll leave us on this front. Uh here we go with uh with all the tickers there. But um Michael, what do you think? Is there any uh questions there? Anything I should dive in more on? Just because it's topical, Luke.

SPEAKER_00 34:30

Does any of it impact demand for carbon credits at all? It well, it does.

Best Risk Reward Right Now

SPEAKER_01 34:35

I mean, it's interesting. We've got um the low correlation comes from how the supply is managed. But we, you know, it's not uh an alien technology. It's uh it's a it's a market that derives its demand from industry. And so we will see if we see, so for example, the beginning of the Ukraine crisis, the m the price of natural gas spiked. Immediately the price of carbon spiked. Why? Because if natural gas is getting more expensive, people will need to go back to burning more coal, which will increase emissions, which increases demand for carbon credits. So we saw the carbon credits increasing. But then natural gas got so expensive the whole industries in Europe had to shut down. So Germany couldn't make fertilizer. They couldn't make certain um metal products. And because of that, factories were shutting down and not polluting at all, and therefore didn't need to buy carbon allowances. And we saw a reversal in that, in that price. So it's not immune from the real world because it's it's a it is a commodity. It's a tangible trillion dollar commodity. But it does move differently and for different reasons, and that's why it's a real it's a real asset that is uh exposed to the world in a in a slightly different way, or in a very different way, in fact, than other things. And I that's as good as it gets, I think, when you're looking for an old.

SPEAKER_00 35:57

This one's from Brian asking, uh, which market do you think offers the best risk reward now?

SPEAKER_01 36:02

Um I always try and stay balanced on this and talk about the blend we have in the global fund, but it it is very hard to ignore the California story. You've got strong support, I mean structural support right where we're trading, a 5% plus CPI adjustment coming next year that was we're pretty much pricing linear towards that. Um, and if we get the reforms we want, we can really lift off from that price. And if the big the market gets some confidence, we could be significantly higher. So it's got to be California, I think. And um that that that is also what the institutions are uh are saying as well. But diversification is good too.

SPEAKER_00 36:47

And then uh can we see the KRBN performance slide once again? Global carbon. Yeah, this is this the one in here might be the index.

Global Fund Mix And Exposure

SPEAKER_01 36:56

Uh well, here we go. So this is which one is this? This is the price of EUAs. So this, you know, the black is the performance up until 2025 with some forecasts. So they those are not performance, those are forecasts. Um, you can see here uh what I quite like this slide. Uh, I didn't show it during the conversation just now, but what we show is is that the price correlates incredibly with when you have tightening supply or um uh so green, green and yellow essentially. Yellow being when the supply is not tightening relative to the past, and green is when it is tightening relative to the past. And you can see that prices have always risen um when supply is tightening, in you know, net supply is tightening. So you yeah, you can see that here. Now we've we've come off a little bit the last couple of months. Um, and so that's just and this is just Europe, not not California, uh not global. Um here is California, which is sort of skewed a little bit by the the fact it does have the CPI compounding CPI plus five. Um and so let me see if I've got a global chart for you here. This is the this is the history of the the um index going to the end of the year. And so the our fund has been around pretty much our timing was beautiful uh since since about here. I mean, it was already up so much, but it just got dwarfed by that. And that's what's interesting. Europe, just as we launched, Europe was rolling over from growing surplus to shrinking surplus. And that's why we had price liftoff. California is just doing that now. So it's another reason why I like California.

SPEAKER_00 38:45

And then that's one from Lloyd. Uh speaking about California, how much California exposure is in the global fund? Uh 25%.

SPEAKER_01 38:52

25%, okay. And we we and then we have another 5% in Washington, which is a comparable program to California. Yep, okay, that's interesting.

Entry Points And Breakout Catalysts

SPEAKER_00 39:01

Um I I think you may have touched on this a little bit earlier, but sort of the um the typical allocations. Yes, it's good, I think we'd agree it's considered more of an alternative strategy, but um within the alternative space, it does it tend to make up a large portion of alternative allocations? I mean, what do you see from advisors?

SPEAKER_01 39:18

Yeah, well, it this is um we've seen it fluctuate. We've seen um, you know, we'd see the classic scenario where when it performs, people allocate and don't always experience. We'd we'd love to see people putting this position on now because California is back to the floor price, Europe has sold off um because you know natural gas prices have been so volatile. It's a very good entry point here rather than waiting until you know it's up 25% and then and then uh then allocating. So we've definitely seen we we're managing across our our all of our uh carbon funds somewhere around 400 million right now. We were managing 2 billion um in 2022. So um it's it's really ranged. Advisors, um, we've seen more like the big RIAs and family offices allocate that mainly most of our conversations are with the single families or the you know smaller family offices. Um and that's where we start to see allocations. And we do also have a private fund, an institutional uh 3C7 fund, but some of those larger family offices access it through that. So they're outside of the ETFs. But the ETFs provide immediate, you know,$25 a share type exposure that can fit into any portfolio.

SPEAKER_00 40:40

And then uh Luke, from your perspective, just given that, you know, somebody looks at Turf KRBN, it's you know, it's about sideways for a couple of years. Um, what is there any kind of catalyst you can point to that would that would kind of break out of this range that we've seen?

SPEAKER_01 40:53

Yeah, yeah. So so we've got we've so Europe has exited the three years post-Ukraine, which is where they added extra supply. We are at the end of them adding that extra supply. So if you imagine it was they were throwing water on the fire for three years to keep to keep the prices stable while they were negotiating through the Ukraine crisis. We're now beyond that. It could be argued they oversupplied, which is why prices, well, they did. I mean, prices came down quite a bit. And so it's almost it's a little bit we, you know, the analogy everyone will get is it's a bit like QE. You know, it's is you put QE in, you add money to the system, prices go up, dollar can devalue. You stop QE, you pull that back out of the system, and we all can kind of understand what that will do. Well, the same as hiking rates versus cutting rates. So Europe is, and it is almost the inverse. Europe is cutting supply, which will make each unit worth more, and we should see prices starting to rise. And and not in a um, not in the sense, you know, I people ask me a lot, they say, oh, some of this sounds a bit like the way crypto works and the the Bitcoin halving. And I get the analogy, but the difference is I don't think prices go up just because someone reduced supply. There is a fixed industrial demand for this commodity. And so if you do reduce the supply, then there is a fixed amount of buying that still has to happen, which is why prices rise. So it's not, it's not like a theoretical if this is tighter, it will go higher. We know that there's industrial buyers. And in fact, even when prices are low, we see the industrial buyers being a natural buyer, which is why there is that sort of downside protection.

SPEAKER_00 42:41

Maybe um as we start to wrap up here again, folks, if you're ever to see credits, I will email you, as I've been saying uh since the start of the presentation with bots uh to get your information with the CP board. But um any any kind of things that you think we we uh we missed or that should be emphasized, uh, and how do people learn more about the fun outside of this webinar?

SPEAKER_01 42:59

I I think you gave me a great opportunity to uh to say everything I needed to say. I mean, that that key point is that this is not a niche anymore. This is, you know, there's there's uh at least three ETFs available out there in the market, it's a trillion dollar traded volume. This is backed by gov this is government paper, um, and is and we trade it in the futures market, which is which itself is uh which is where that trillion dollars of of liquidity is. And so if you can get a high sharp, low correlation investment, it's just it, you've you've got to have that in this in this environment where we're not sure what stocks will do. We're not sure what the dollar will do. And maybe I note that the fact that we've got these foreign exposures in here, you're getting long those, you're getting short the dollar on those pieces, which is a is uh is a is a freebie, if you like, in this exposure that you also um get exposed to the weakening dollar.

Political Risk And Program Durability

SPEAKER_00 43:57

I think that's a uh good place to wrap up this conversation. I'll see if there's any other questions. Doesn't look like it's one, okay. Um one last question here. Um these are regulated markets where these instruments are created and can be voided. Ontario, for example. Uh, what surety do you have that this will not happen?

Wrap Up And Where To Learn More

SPEAKER_01 44:14

Yeah, well, so we've got this is um the market is trading the floor in California. Europe is trading at this support level where uh where this where we have tapered the supply post Ukraine and everything I talked about earlier. These markets are not trading, um, these are officially. Markets. They're not trading at um distressed levels. They're trading at the bottom end of their ranges. What I mean by that is that the mechanism is robust. If there was fears that this pro these programs um are not going to exist in the future, then they'd be trading at a discount to their reserve price. But they're trading at their reserve price. And so these also exist only in markets that have sort of supermajority support for these programs. And the other thing is economics. These programs are raising billions of dollars. And so, and this is just the beauty of the capitalist system that these have been generated in. Basically, like every good tool, there's a layer of regulation around free markets. And so there's there's there's guardrails have been set. Those guardrails ensure that there is a revenue that is generated that can makes these sort of politically um, while while costs in the energy sector may be seen as politically uh risky, or on one side of the spectrum, the the revenues generated that go back into the system, back into these economies is the counterbalance for that. And so we found that even countries with high um you know coal usage don't like having to buy carbon allowances, but they also really like getting the carbon revenues from the European Commission. And so those things counterbalance. So they're pretty well politically protected. But as we said sort of earlier on, the source of volatility in this market generally does come from politics. So that is the source of vol. The growth is the tightening supply, the vol is is uh the political noise. And so that is part and parcel of this this investment.

SPEAKER_00 46:18

And folks, appreciate those that attended this webinar. Hopefully you found it uh interesting. Uh special thanks to Luke Oliver, of course. Learn more about Crane Shares at cranechhares.com. Number of funds, but this is certainly a neak uh different spin on a part of the marketplace most people are not paying attention to, uh, which is maybe why you should. Uh so thanks, Luke. I appreciate your time here. Thanks, Michael. Have a good one. Cheers, everybody.