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February
07
2022

Get on the Right Side of “Carbon Inflation”
Andrey Dashkov

Prices are soaring due to inflation…

By now, I’m sure you’ve felt the effects on your wallet.

But one thing is critical for your understanding of where inflation is headed next.

It’s a massive, hidden inflation driver… and it’s up 155% in the last year alone.

You won’t find it on the front page of popular financial networks…

In a moment, I’ll show how you – as a smart investor – can profit from it. But first, some background…

This Critical Inflation Driver Gets No Mainstream Coverage

The inflation driver I’m talking about rose almost two-and-a-half times as fast as fuel oil last year.

Fuel oil was up 59.3% compared to its November 2020 level, according to the U.S. Bureau of Labor Statistics.

But while we’ve heard tons about the rise in fuel prices, we’ve heard very little about how the European Emissions Allowance soared by 145% between November 2020 and November 2021.

For those who don’t know, the Emissions Allowance is a right to emit one tonne of carbon dioxide equivalent. If you buy it, you can put one tonne of greenhouse gases into the atmosphere.

Some companies get them for free, while others bid for these allowances through auctions. So the price is influenced by the market, as well as governments.

If you have an allowance but don’t need it anymore, you can sell it to someone who does.

Since these allowances can trade freely, their price is set by the market participants.

And over the past year, as of writing, the European Emissions Allowance price is up 155%.

Think of this allowance as: “How expensive is it to emit greenhouse gases?”

Businesses must decide how much they would pay to emit one tonne of CO2 equivalent… without damaging their bottom lines.

And emitting one metric tonne of carbon dioxide equivalent has become almost three times more expensive over the past year.

This is a sign of the things to come…

As the world is moving toward its “green” goals of achieving net zero emissions, both governments and investors will continue making it more difficult to emit greenhouse gases.

The companies that want to continue doing so will have to pay because emissions regulations, like the European Emissions Allowance, are likely to come sooner or later to the U.S.

Sixty-nine countries use it as of writing, and it’s estimated to be the most effective way of reducing emissions.

Senate representatives from Oregon and Rhode Island have already publicly supported this method.

I think that this year, the cost of emitting greenhouse gases can add another 10-15% as the post-pandemic “green recovery” accelerates.

I would also expect carbon pricing to become a more widely discussed topic in the United States… because steel is one of the biggest greenhouse gas emitters. And the U.S. is the world’s fourth-largest producer of crude steel…

Carbon Will Create Long-Term Inflation

Unless the technology of producing steel changes, manufacturers will be left with few options but to buy the right to emit these gases.

But emissions are becoming more expensive… which means that steel producers could start passing that cost along to consumers.

In other words, costly carbon emissions will result in higher steel prices.

If you apply the same principle to almost any industry, you end up with the same conclusion: higher emissions costs will likely push up the price of the product.

And I don’t see any way emissions prices could go down, while keeping with governments’ climate goals.

So we’re looking at a megatrend that could create inflationary pressures for most product groups…

Forget about higher wages or shaky supply chains…

It will become more and more costly to be in a “dirty” business, at least as far as carbon emissions are concerned.

What You Should Do to Get on the Right Side of This

One way of protecting yourself against this “carbon inflation” is looking at companies with little exposure to carbon in the first place.

An ETF called iShares MSCI ACWI Low Carbon Target ETF (CRBN) looks to track a group of companies whose carbon exposure is lower than that of the general market.

These could be less exposed to the cost pressures of expensive emissions rights.

Pay attention to this space and position your holdings accordingly. This “hidden” inflation driver could create a massive, decades-long trend.

Good investing,

Andrey Dashkov
Analyst, Casey Research

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Andrey Dashkov, a native Russian, studies international finance and banking at Belarus State Economics University. In 2007, he met Louis James who was impressed with his enthusiasm and diligent research skills. Since then, Andrey has been researching global inflation, base metal and stock data, as well as company news for Casey Research. Thanks to his language skills, Andrey is an invaluable member of the team when it comes to looking into data from Russia, one of the world's major resource explorers.

 

www.caseyresearch.com