Crypto/Carbon

Crypto/Carbon

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What is carbon?

The amount of CO2 in the atmosphere is increasing at an unprecedented pace. The rate of CO2 growth over the last decade is 100 to 200 times faster than what the Earth experienced during the transition from the last ice age. In order to mitigate the threats of man-made climate change, environmental, business and political leaders have developed and implemented various types of mechanisms. The most widely adopted and ultimately credited for most CO2 reductions are: carbon tax and cap-and-trade programs (ETS). The first one serves a good start and a carbon price floor in many countries, but it is also largely perceived by the market participants as a punishment. The latter is embraced more positively and serves as a reward for emissions reductions. In short, ETS is vastly superior to carbon tax, it creates competition between the emitters and triggers new investments and R&D.

 

Investing in carbon

Thanks to the Paris Agreement carbon trading programs are proliferating all over the world. More than 40 countries are relying on carbon markets to reduce their emissions. This sends a positive signal to other 100 countries which are considering or developing cap and trade programs. To achieve the ambitious limits, set in Paris Agreement the price of carbon must be at much higher levels therefore the allocation of carbon credits to carbon markets will have to be more and more restricted.

According to many analysts, carbon price will reach $50 per ton of CO2 by 2025, almost tenfold increase in 7 years. This makes an emission allowance a worthwhile long-term investment. London-based fund managers Schroders recently published the study where they estimate that carbon prices will have to increase to well over $100 a ton to incentivize decarbonization on the scale needed to meet the 2C goal of the 2015 Paris Agreement.

Virtuse is the world’s first trading platform to enable clients to buy and sell emission allowances in Europe and Asia. Investors seeking opportunities to invest in carbon markets can now invest in 90% of global emissions markets. Our specialists understand volatile and unique carbon markets around the world and advise on the risk management strategies efficiently.

With our 10-year experience in the carbon markets, and over 200 million allowances traded we can avoid the uncertainties of politics, regulation, hedging behaviors of those markets. We assist and consult private investors and companies in the best hedging and/or investing strategies in this fastest growing commodity markets.

 

How does it work?

For instance, one company (A) which invested in cleaner technologies will sell the surplus to one that didn’t (B). Company A can afford to maintain the same price for end customers because its investments in clean technology and profit from selling the surplus but Company B most likely will have to increase the price for end customer. In time only the companies which developed the proper solution will survive. At least this is the logic behind ETS system. In a case of carbon tax, companies usually pass on the cost directly to the end consumers. In a nutshell, carbon tax is a good launching pad for the future ETS, however, as such, possesses large disciplinary attributes, where an ETS, rewards and motivates polluters to reduce their emissions.

Trading with Virtuse

With over 12 years on the market and 200 million tons traded, Virtuse Group combines trading expertise, intelligent data and unparalleled knowledge of Chinese, European and Global emissions, energy and renewables markets. In 2010 Virtuse pioneered the carbon emissions industry under EU ETS and became one of the largest emissions brokers in Europe. In 2014 the company became the first foreign broker on Chinese ETS in freshly launched China Emissions Exchange (CEEX) in Shenzhen, and has developed into one of the largest international broker and trader in China.

Virtuse carbon team has a primary focus on the compliance customers to allow them to efficiently and effectively manage their carbon exposure. Virtuse offers industrial clients access to the carbon market and portfolio management in a variety of carbon products. The team offers advice and trading strategies to suit all market participants including compliance clients, institutional as well as private investors. Virtuse provides effective solutions tailored specifically to manage and optimize the carbon position and complete sales and trading strategies throughout the transaction.

Three ways of trading carbon

There are three ways to trade allowances:

1. Bilateral Trading
This is the simplest form of trading. It is a peer-to-peer transaction between two participants and there are no intermediaries involved in the trade. The main drawbacks for this way of trading are high transaction cost, low transparency, high level of counterparty risk and the lack of free advisory services. However, some blockchain technology companies are currently working to eliminate these imperfections.
 

2. OTC Broker Trading
At this form of trading a broker brings market participants together and pools liquidity in a market place. Client receives free advisory services and the costs are usually low in comparison to other forms of trading. Broker may even buy and sell on behalf of a client on the carbon exchanges which provide a high degree of transparency.

 

3. Exchange Trading
This form of trading is arguably the most transparent and possessed the highest level of safety. However, the transaction and administration costs are by far the largest out of all forms of trading due to high membership and clearing fees involved. Emissions exchanges are usually constituted by the governments as natural cartel like oligopolies and many times create large barriers to entry for mid and small-sized participants. Overall, it is fair to say that exchanges favour large corporations to smaller ones and act as a hindrance to the progress in free-market trading.  

 

4. Trading with Crypto-Carbon 

Virtuse Exchange leverages Digital Asset Collateralized Contracts (DACCs), a model that allows to convert your cryptocurrencies into carbon, without having to move money from one wallet to another. The DACCs act rather like a stablecoin whose value can be pegged with a reliable price feed to the value of USD. You can buy and sell crypto carbon seamlessly and hold it on your private keys. 

Types of carbon products

 

Spot 

Buying or selling carbon credits with spot (immediate) delivery has the advantage that counterparty risk is minimized. When buying carbon credits on a spot basis, clients can be assured that the allowances will be in their account for compliance. When selling carbon permits, it is the quickest way to monetize your carbon assets. 

Forward 

Forward buying and selling of carbon permits means trading these certificates at a present time with payment and delivery at a future date, set at the time of the transaction. The forward contract price is set in the present and payment will be made at a later date, also set in the present. The advantage of this transaction is the price accuracy. Transacting on a forward basis can also reduce the cost of financing. Trading at future dates, however, exposes clients to counterparty credit and market risks.

Futures, swaps, options

The carbon market has progressed since its modest beginnings, when carbon trading was about a simple trade between two parties: one needing a permit or offset credit for compliance, and the other having one to spare. Carbon is now being marketed as a new asset class for investors. Trading for speculation rather than compliance changed the dynamic of the carbon market. In some markets Carbon finance has reached the point of maturity, and the nature of the trading has changed significantly.

Futures transactions are concluded through specialized carbon exchanges. The price is set in the present and allowances delivery and payment will be made at a later date, also set in the present.

For settlement transactions (both immediate and forward) allowances are usually being exchanged for cash. This is the simplest form of allowance transfer and the most common in emissions markets. Trading futures allows you to mitigate the impact of adverse price movements or to profit from changing demand and supply fundamentals affecting the market. It allows clients to mitigate or increase the price risk associated with carbon prices.

Swaps have also become a popular type of transaction. In carbon markets, swaps, for example, allow one party to exchange allowances of one vintage year for allowances of another vintage year from a second party.

Options represent a small but growing percentage of carbon market activity. The hedging, profit-taking, raising cash and arbitrage strategies are considered as the main drivers of growth in options markets. Continuing global financial uncertainty and reduced access to cheap lending are cited as additional factors for the continued growth of options trading in ETS permits; options can provide a source of financing when other alternative financing is not available or more expensive.

Open an account

To trade on carbon prices with Virtuse Exchange, you’ll need to open an account.  It takes a matter of minutes, can be done entirely online, and there’s no obligation to fund once you’ve finished your application.

However, you will need to fund before you place your first trade. Funding a wallet account is simple – you can use send USDT, Bitcoin, ETH to your wallet or soon will be able to fund it with a debit or credit card. 

TRADE

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