Carbon Credit Strategy Fund — Compliance & Voluntary Markets

Carbon Credit Strategy Fund: Investment Returns From the Price of Pollution

The global carbon credit market is one of the fastest-growing commodity markets in the world, driven by a simple structural force: governments and corporations have made legally binding commitments to reach net-zero emissions, and carbon pricing is the primary mechanism by which those commitments translate into economic incentives. As carbon prices rise to reflect the true cost of decarbonisation, and as the supply of cheap emission reductions diminishes, structurally positioned carbon credit portfolios benefit.

This fund takes an active approach to carbon markets — combining long-term spot positions in compliance and voluntary carbon credits with active futures and basis trading, and direct origination of voluntary carbon credits from forest protection and energy efficiency projects. The fund targets net returns of 12–18% per annum, with a return profile driven by structural policy trends rather than conventional financial market factors.

The Carbon Credit Landscape

Carbon markets fall into two broad categories, each with distinct pricing dynamics, regulatory frameworks, and return profiles:

Compliance carbon markets are mandatory regulatory systems where emissions-generating companies must hold sufficient carbon allowances to cover their regulated emissions. If they emit more than their allocation, they must buy allowances; if they emit less, they can sell surplus allowances. The price of allowances is set by the supply-demand balance of the market, which is determined by the regulatory authority's issuance schedule, the rate of industrial emissions, and the policy ambition of the cap trajectory.

Major compliance markets accessible to the fund include the EU Emissions Trading System (EU ETS) — the world's largest compliance carbon market, covering approximately 40% of EU greenhouse gas emissions — the UK ETS (launched 2021 following Brexit), the California Cap-and-Trade programme (linked to Québec), and the Regional Greenhouse Gas Initiative (RGGI) covering US north-eastern power sector emissions.

Voluntary carbon markets allow corporations, governments, and individuals to purchase verified carbon credits to offset emissions not covered by mandatory regulation. These credits are generated by projects that reduce or remove atmospheric CO₂ — avoided deforestation (REDD+), renewable energy deployment, soil carbon, direct air capture, and others — verified under internationally recognised standards including Verra VCS, Gold Standard, and the American Carbon Registry.

Investment Strategy

Compliance market spot allocation (approximately 40%): Long positions in EU ETS European Union Allowances (EUAs), UK Allowances (UKAs), and California Carbon Allowances (CCAs). These positions are held with a medium-term horizon of 12–36 months, expressing a view on the structural upward trajectory of compliance carbon prices as regulatory ambition tightens. The EU ETS cap reduces by 4.3% per year over 2024–2027 (rising to 4.4% per year from 2028) under the current Fit for 55 legislation — a mechanically tightening supply that creates structural upward price pressure absent a severe economic downturn.

Futures and basis trading (approximately 25%): Active trading of compliance carbon futures contracts, exploiting the seasonal patterns in carbon prices (European power sector demand for heating in Q4/Q1, auction supply seasonality), spread trading between markets (EUA/UKA basis, front/back calendar spreads), and event-driven positioning around EU policy auctions, Phase IV allocation announcements, and MSCI/Bloomberg index rebalancings that drive institutional flows.

Voluntary carbon credits (approximately 25%): Long positions in high-integrity voluntary credits — specifically nature-based solutions (REDD+ avoided deforestation, afforestation, improved forest management) and technology-based removals (biochar, enhanced weathering, direct air capture where economically accessible). The fund applies a quality screening process: only credits certified under Verra VCS with additional CCB (Climate, Community and Biodiversity) standards or equivalent, and only projects with credible monitoring, reporting, and verification practices and no significant permanence risk.

Project-level origination (approximately 10%): Direct forward purchase agreements with project developers generating voluntary carbon credits from projects currently in early operational phases. The fund provides advance purchase commitments at a discount to current spot prices in exchange for future credit delivery. This origination premium — the difference between the forward purchase price and the eventual spot sale price — provides an additional return layer above simple spot market exposure.

Policy Tailwinds

Several structural regulatory developments support the fund's return thesis:

The EU ETS reform under the Fit for 55 package mechanically tightens the supply cap through a steeper annual reduction factor. The EU Carbon Border Adjustment Mechanism (CBAM) creates demand for EUAs from EU importers of carbon-intensive goods, adding new demand to the market from 2026.

The Integrity Council for the Voluntary Carbon Market (ICVCM) Core Carbon Principles and the Voluntary Carbon Markets Integrity Initiative (VCMI) Claims Code of Practice are establishing credibility standards for voluntary credits that support price differentiation between high and low quality credits — with a premium for those meeting Core Carbon Principles criteria.

The Article 6 framework under the Paris Agreement, progressively being operationalised, creates a pathway for government-endorsed internationally transferred mitigation outcomes (ITMOs) that could bridge compliance and voluntary markets over time, potentially driving significant convergence and price appreciation.

Risk Considerations

Policy risk: Carbon markets are entirely dependent on government policy support. A material rollback of the EU ETS — or failure to tighten the cap as legislated — would reduce the fundamental demand underpinning EUA prices. Policy risk is the dominant risk in this asset class.

Voluntary credit quality risk: Voluntary carbon markets have faced significant credibility challenges, with research suggesting some widely used credits have overstated their emission reduction claims. The fund's high-quality screening process mitigates but cannot fully eliminate the risk of investing in credits that are subsequently de-rated.

Carbon price volatility: Compliance carbon prices are inherently volatile — EU ETS prices fell by roughly half between their early-2023 peak of around €100/tonne and early 2024 before partially recovering. The fund's active trading approach and diversification across markets reduces but does not eliminate exposure to sharp price movements.

Liquidity: EU ETS futures are highly liquid. California CCA markets are less liquid. Voluntary credit markets are over-the-counter and can be illiquid for large positions. The fund's portfolio construction weights positions to available liquidity.

Concentration risk: Despite covering four compliance markets plus voluntary credits, the fund's return is heavily influenced by EU carbon policy — the EU ETS is the largest and most liquid market and dominates the portfolio.

Suitability

The carbon credit strategy suits investors who understand commodity and energy markets, are comfortable with policy-driven volatility, and want exposure to the structural long-term trend of rising carbon prices as decarbonisation commitments are implemented. It is appropriate as a diversifying alternative for sophisticated investors — not as a defensive allocation. Minimum investment $100,000.

How to Invest

Contact our investment team to receive the fund's offering memorandum, carbon market outlook, strategy performance attribution framework, and voluntary credit quality screening criteria. Professional investor qualification required. Minimum investment $100,000.

Important: Capital is at risk. Carbon credit prices can be highly volatile and are subject to significant policy risk. Past performance is not a guarantee of future returns. This is for information purposes only and does not constitute a personal recommendation. Seek independent financial advice before investing. This fund illustrates the type of carbon market investment opportunity Global Investments advises on — it is not a live investment offer.