Bubble in carbon credits during COVID-19: financial instability or positive impact

What is it about?

centivising businesses for lower carbon emissions and trade back excess carbon allowances paved the way for rapid growth in Carbon Credit ETFs. Use of Carbon allowances as a Hedging alter-native fuelled this rally further, causing a shift to speculation and forming repetitive bubbles. Speculative Bubbles are born from euphoria, yet, they are relatively predictable, provided their pattern matches the log periodic power law (LPPL) with specific stylized facts. A “Minsky mo-ment” identifies a clear speculative bubble as a signal of financial system instability, while a “Social bubble” is regarded as relatively positive, increasing, in the long run, infrastructure spending and development. The aim of this paper is to investigate whether various carbon credit bubbles during the pandemic period caused financial instability or had a positive impact (“Minsky” or “Social”). Particularly, we investigate the Carbon Credit bubble behaviour in the ETF prices of KRBN, GRN (Global Carbon Credit tracking ETFs) and the SOLCARBT index during the COVID-19 pandemic period, by adopting the log-periodic power law model (LPPL) method-ology which has been widely used, over the past decade, for detecting bubbles and crashes in various markets. In conclusion these bubbles are social, propelled by the newfound interest to-wards Carbon Credit trading, for obvious reasons.

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Why is it important?

This study contributes to the existing literature as it searches for a common thread across the Carbon Credit bubble of the prices of two ETFs during COVID-19 by using the Filimonov and Sornette (2013) modified LPPL: [GRN (iPath Series B Carbon ETN) which holds futures contracts on EUAs (European Union Allowances) and CERs (Certified Emission Reduction) that measures the performance of emissions units and KRBN (Krane Shares Global Carbon Strategy ETF) which is benchmarked to IHS Markit’s Global Carbon Index, which offers broad coverage of cap-and-trade carbon allowances by tracking the most traded carbon credit futures contracts] and the SOLCARBT index (Solactive Carbon Emission Allowances Rolling Futures Index).

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