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Alternative Market Briefing

Carbon Cap's World Carbon Fund wins Amsterdam AIF Factor prize

Thursday, February 06, 2020

Matthias Knab, Opalesque for New Managers:

The 9th ABN AMRO Amsterdam Investor Forum (AIF) organized by ABN AMRO Clearing on Feb. 5th 2020 saw once more five alternative investment funds competing to deliver the "most convincing" 3-minute pitch to an audience of 250+ professional investors and managers. Delegates then cast their votes, selecting the most convincing pitch as the 2020 AIF Factor winner.

The following five funds were shortlisted:

  • World Carbon Fund, Carbon Cap Management LLP
  • NN (L) Multi Asset Factor Opportunities, NN Investment Partners
  • VOC Fonds, Stuiver Asset Management B.V.
  • Systematic Alpha FX Master Fund Ltd., Systematic Alpha Management, LLC
  • Tages Paladin UCITS Fund, Tages Capital

Carbon Cap Management's World Carbon Fund, represented by Founder and CEO Michael Azlen, won the competition with a clear margin. The fund is currently in its final launch phase and will invest across multiple liquid compliance carbon markets. The management and investment team comprises a combined experience of more than 75 years across investment management, energy and carbon market proprietary trading and global carbon pricing policy design and analysis.

Azlen believes that the outlook for carbon prices over the next decade is very positive, however, carbon markets can exhibit high volatility driven by a range of "market" and "policy" factors. As such, his fund will deploy two complementary strategies: "Core Long" and "Alpha Strategies". The Core Long strategy will generate returns from a rising carbon price combined with disciplined risk management. The Alpha Strategies will generate returns from arbitrage and relative value strategies deployed across physical carbon, futures, and options.

Carbon markets have expanded globally and now trade more than $1 billion per day and are liquid and transparent as well as highly regulated. Azlen pointed out that the World Carbon Fund will not trade in the Voluntary carbon market as it is much smaller in size and does not have daily liquidity.

Carbon Cap has completed proprietary research on carbon as an asset class and has determined that carbon has no correlation to traditional and alternative asset classes and has been generating high annualized returns over the past 7 years since the signing and ratification of the Paris Agreement.

In addition, alpha opportunities exist due to the unique nature and structure of these markets and Portfolio Manager Nigel Felgate PhD, has been trading carbon very successfully over the past 15 years for major US banks.

How carbon markets address an important market failure

Climate change and carbon emissions are a good example of what is known as a market failure since the market is not functioning to maximize the welfare of society as it does not factor in the damage caused by carbon emissions.

It is generally accepted that the best way to correct a market failure is to place a price on the externality that reflects the true cost. In the case of climate change, this requires putting a price on a tonne of carbon that reflects the real cost to society. This cost is sometimes referred to as the "social cost of carbon" and by some estimates ranges from $10 to up to $5,000 per tonne of emissions.

Cap and trade carbon markets have been a successful policy tool to reduce carbon emissions and facilitate the achievement of the Paris Agreement goals to limit global warming to well below 2 degrees. These markets place a cap on total emissions in a region and the cap is reduced annually providing environmental certainty on emissions reductions. Covered entities can trade emissions allowance certificates, and this trading activity ensures that the emissions reductions are achieved at the lowest possible cost.

Successes with Emissions Trading

One of the earliest success stories for cap and trade was the system implemented in the USA in 1990 to curb sulphur dioxide (SO2) emissions that were causing acid rain. The Clean Air Act amendments of 1990 aimed to slash annual SO2 emissions by 10 million tonnes, out of the total 26 million tonnes being emitting mainly by 3,200 coal plants. The government freely allocated emission allowances and then let the companies decide how to trade them in order to meet the requirements under the new, much lower cap on total emissions. Between 1990 and 2004, SO2 emissions from the power sector fell 36%, even though total energy output from coal-fired power plants increased by 25% over the same period. By 2010, total emissions had fallen to only 5.1 million tonnes, a reduction of 81%. The program was so successful that Harvard University produced a full report highlighting the successes and what was learned.

In Europe, the EU Emissions Trading System "ETS" was established after the success of the US system and is also considered to be a success. Since its implementation in 2005, annual emissions have declined by approximately 1 billion tonnes or 29% while real GDP grew by 8% over the same period. The EU has one of the lowest per capita emissions in the world and the emissions per unit of GDP continue to fall.

Azlen added that his firm is fully committed to "market-based" solutions for climate change that will assist in the capping and reduction of emissions, both directly and indirectly. As the fund grows, it will hold more Carbon, taking this supply out of the market and assisting in providing a strong carbon price "signal" to the market. Secondly, Carbon Cap has committed 20% of the performance fees generated to the purchase and permanent cancellation of carbon allowances/offsets, thereby achieving a direct climate impact.

As an example of the impact, Carbon Cap has calculated that a $1 million investment in the World Carbon Fund could eliminate 200 tonnes of carbon per year based on achieving a 10% net return. This is approximately 30 times the carbon footprint of the average European.

Michael Azlen is building this firm based on his 25 years of industry experience, including the founding, growth, and sale of a regulated investment management business to a public company. Since the beginning of 2018, he has been researching climate change and environmental investment and has focused his research on carbon pricing and Emissions Trading Systems (ETS). Carbon Cap has written an academic paper "The Carbon Risk Premium" which will be shortly published in an academic journal. |

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