Here’s the lead-in to Michael Robinson’s teaser pitch for Digital Fortunes ($149/yr), one of the newsletters he took over from Lou Basenese last year…

“You might remember President Ronald Reagan as the champion of the middle class…

“Making America great again…

“Fighting communism…

“Or you might remember him for his sweeping tax cuts and inflation-busting economy…

“But there’s another, much more controversial story about Reagan you’ve likely never heard before.

“You won’t find it in any history book, and even die-hard conservatives try to deny it.

“But in 1982, Ronald Reagan took revenge on a global crisis… And created a radical new ‘secret currency…’

Oooh, we do love a secret! What is it?

“And right now, today, Reagan’s Revenge is being rolled out again…

“Leading to the rise of another “secret currency” — One the International Monetary Fund estimates could grow as high as 24,900%!”

To bypass some of the marketing language, that “secret currency” Robinson is touting is essentially just the idea of a “cap and trade” system for cleaning up the environment — Reagan’s government used it for the leaded gasoline crisis in the early 1980s, and also for sulfur-dioxide “acid rain” fight later that decade. It’s a pretty basic way to harness capitalism to solve problems — you assign a value to something and set limits, in this case negative limits (you can only emit XX tons of sulfur dioxide), and then you let people trade those credits, incentivizing the companies who can figure out how to reduce their own emissions and profit from that by trading their excess “credits” to companies who can’t or won’t make the same moves. Over time, it certainly helped with both the acid rain and lead problems, though I don’t know to what extent specifically, or whether President Reagan was personally involved.

And Robinson says there’s a new “secret currency” on the block now… I bet you can guess what it is, but let’s hear his hints just to be sure:

“… if you knew about this “secret currency…”

“You could’ve more than doubled your money while the rest of the market has taken a nosedive!

“And in fact…

“This currency is so lucrative, that none other than Elon Musk have been leveraging it to make Tesla profitable for years.”

He shows a little graphic which includes some of the money Tesla made from this “secret currency” recently, including $679 million in the first quarter of 2022. That refers to just “regulatory credits” in general, which are effectively credits that Tesla earns for selling zero-emissions vehicles, and can re-sell to automakers who have not been able to sell enough zero-emissions cars. The method is different in every market, whether it’s California or China or the EU, but it’s a high-margin part of Tesla’s business, and for a while it was the only thing that made it possible for Tesla to be profitable (that’s no longer true)… though the number has also been shrinking of late, as other battery-electric vehicles have entered the market and Tesla has earned a smaller share of the incentives (and had fewer buyers for their credits) as large automakers have caught up to meet government emissions standards. So that’s one “cap and trade” system, though it’s pretty specific to electric vehicles.

Robinson broadens the story a bit, so it’s clearly not just about green EV credits…

“I can almost guarantee you’ve never heard about this from any of your friends, neighbors or golfing buddies.

“Yet despite the secrecy…

“It’s already spiked 840% higher than the S&P 500… and 635% higher than the Dow Jones Average, and I believe it will soar even higher in the coming months.

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“And it’s not just me who sees the opportunity with this secret currency…

“Because even major global banks are teaming up to advance this “Secret Currency…”

“Not only are some of the biggest companies on the planet pouncing on this “secret currency…”

“Companies like Delta Airlines, Alphabet, Disney, JP Morgan Chase, Salesforce, Netflix, and Amazon…

“The ‘currency’ is growing so fast, major banks are even teaming up to accelerate its growth….

“… according to global consulting firm McKinsey, the market for this secret currency could soar 15X over the coming years…

“And an insane 100X in the long run (translation: that’s a 100,000% rise!).”

So what’s the “secret currency?” Really, it’s just “carbon credits” — here’s how Robinson explains…

“The world is gearing up to fight a new crisis as we speak — carbon emissions.

“Now, we could debate the topic of carbon in the atmosphere all day long…

“Whether it’s caused by human activity… if it’s just cyclical…if the planet will be burning hot 10 years from now or a thousand years from now… or whether it even matters over the long run.

“But that’s all beside the point…

“Because, as one of the world’s leading financial analysts, it’s my job to put politics aside… and focus on the money.

“And what’s the money saying right now?

“Well, like it or not, the fact is this: there’s a ton of money going into fighting carbon emissions.

“Just like there was fighting lead emissions. And just like there was fighting acid rain.”

And yes, there is a “cap and trade” market for carbon emissions, sort of… that’s why you can buy carbon offsets when you book an airline flight, and why companies can claim “net zero” emissions.

Where does he get the big percentage numbers for potential gains? Mostly by starting at an irrationally low price…

“According to the World Bank Carbon Pricing Dashboard, carbon prices in some places are as low as 30 cents per ton…

“But the International Monetary Fund claims that, in order to achieve current carbon emissions goals…

“The price should be around $75 per ton.

“That’s a 24,900% rise in the price of these carbon credits!

“But the United Nations claims the price of carbon should be closer to $100 per ton to reach our goals…

“If it’s right, we’re looking at a 33,233% jump in prices of carbon credits!”

I guess it’s true that “carbon credits” are sometimes very inexpensive, though that’s mostly because the voluntary credits are not very strictly or consistently regulated and are pretty cheap (carboncredits.com says the ‘aviation offset” is about $2 per tonne now), while the real industrial carbon trading markets where there are actual rules and compliance mechanisms, like the EU right now, are already closer to that “should” price of close to $100/tonne (California is around $30, China around $8, there are different kinds of compliance and different regimes, which makes it confusing to trade globally).

There are plans to build a real global carbon market for cap and trade, under the Paris Agreement, though I have no idea how long it will take to get to that point — we’ve been talking about this for decades, and it’s obviously not easy to get global agreement. We are seeing more and more push in the West to have companies disclose their climate liabilities, so as rules get firmed up in that area by the SEC and others we may see even more attention paid to both the regulated markets and to voluntary offsets, and Robinson says that new SEC rules this year could create a ‘frenzy’ for carbon credits. Here’s what he says to do:

“… simply buying and holding these carbon credits over the years to come should make you profits.

“As more and more companies, countries, and people begin to lower carbon emissions…

“As they pile into ‘carbon credits…’

“The price for carbon is poised to skyrocket.

“It’s basic supply and demand.

“We’ve seen it happen before as lead was phased out of gasoline… and the price of lead credits soared 500%…

“We’ve seen it happen before as sulfur dioxide emissions were curbed, and the price of SO2 credits soared 1,200%…

“And now we’re set to see it play out AGAIN as carbon credits soar thousands of percent…

“Leading to what could be the biggest opportunity this century.”

That’s where the “Circle March 31st, 2023 On Your Calendar” bit of the tease comes in — Robinson thinks that the SEC might implement new “climate disclosure” rules for all public companies by that date, which could set off a frenzy of interest in carbon credits.

Possible? I guess so, though a lot of companies already disclose their climate efforts and try to delineate (and sometimes promote) their ESG strategies and plans, both because big institutional investors require that and because a lot of small investors expect it, but new rules could always shake things up.

So… how to get rich from that? From the ad:

“the BAD news is you CAN’T invest in carbon directly…

“But the GOOD news is I’ve found a hidden “backdoor” to help you profit from its rise!

“And by using this “backdoor” investment, you can take advantage of what could be the biggest investment trend since cryptocurrencies!

“The backdoor I’ve found for you is something you can buy in any major brokerage account…

“… it’s recently outperformed the major market indices, and even gold…”

What is it? A carbon investment fund… here’s how he puts it:

“This ‘backdoor’ is a special type of fund that invests in carbon for you.

“In fact, it spreads out its investments in carbon across the few currently operational carbon credit markets…

“Which means it’s able to take advantage of the EU carbon market… the California carbon market… and the northeastern U.S. market too…”

OK, so that makes the Thinkolator’s job pretty easy this time around… what Robinson is touting is the Kraneshares Global Carbon ETF (KRBN), the biggest ETF that invests in actual carbon credits and carbon credit futures. There are some other carbon futures ETNs, including iPath Carbon (GRN), and some smaller ones from KraneShares, including KraneShares European Carbon (KEUA) and KraneShares Californoa Carbon (KCCA), though I don’t see a reason to go with the tiny or segmented ones if you’re just looking for broad exposure — KRBN is small, too, but it’s much larger than the others. The relatively new competitor in this space is the Carbon Strategy ETF (KARB), which essentially mimics KRBN’s approach but is newer and smaller, with pretty much exactly the same total return since inception, so it doesn’t seem worthwhile to dabble in that while the expense ratio is similar to the KraneShares offering. Here’s how KRBN has done since inception, by the way — it was doing spectacularly well (thats KRBN in purple, the S&P 500 in orange) until Putin’s tanks poured into Ukraine and caused some in Europe to reconsider their energy strategy:

You may also run across a lot of ETFs that are focused on the theme of “reducing carbon emissions,” whether that’s buying Tesla or solar companies or just firms that are doing well with the “energy transition”, though for the most part they aren’t directly involved with carbon credits — there are some interesting ones, including from activist fund Engine No. 1 (their Transform Climate ETF (NETZ)) seems focused on companies that are actively trying to profit from the energy transition, but are mostly in “dirty” industries), but many of them really just own the big tech companies and pretty closely mimic the Nasdaq 100.

I’ve dabbled in Kraaneshares Global Carbon (KRBN) over the past couple years, and it has been a nice ballast for the portfolio, though I haven’t made it a huge position. Here’s part of what I said about the fund when I bought my first shares in mid-2021:

6/21/21: KraneShares Global Carbon (KRBN) ETF is a pretty simple investment into this trend because it’s just directly exposed to the price of carbon emissions offsets in futures trading markets, mostly in Europe (EUA credits), though with meaningful exposure to the two widely-traded US carbon emission credit regimes, CCA in California and GGI in the Northeast… but it’s also likely to face some challenges, largely because ETFs that are primarily based on futures trading (commodities and the like) face the challenge of time decay. If you’re constantly rolling futures positions as each month expires, then you need the prices to go up pretty steadily or else you’re just buying “time premium” over and over and selling without a premium each month as you buy future contracts and close about-to-expire contracts — if prices stay steady or fall instead of rising, your position gradually evaporates. KraneShares says they hedge against this, and that’s enough for me to be confident enough to get some exposure, but we’ll have to see how that works over time before I commit a more meaningful amount of capital. I do expect carbon emissions credits to grow as an asset class, and to become more widely accepted, though they’ve already had a good run in the past couple years so this is not, to be clear, a contrarian or brand new idea.

The big picture argument for any investment in carbon emissions is basically just that the government-imposed cost of adding carbon emissions to the atmosphere, which has already doubled over the past year as demand has risen and the secondary market has gotten more attention, has to at least double again, to roughly $100/tonne, if the world is to even really try to meet the goals fo the Paris Climate Accord. The risk is that the standards for what a carbon credit is are not widely agreed-upon across countries and might change, with China the big question mark as they begin to create their own emissions trading regime, and there are huge markets in voluntary offsets as well as in regulatory credits, and nobody can say for sure how this is all going to work in five or ten years. It’s still early days for this asset class.

There have been pushes in the past to create real “cap and trade” carbon markets, which make obvious and intuitive sense as a way to monetize pollution and greenhouse gas emissions and incentivize lower emissions, and we’re finally seeing some real success with that now, particularly in California and the EU, but it’s not a straight line. “Cap and trade” for sulfur dioxide had a big positive impact on the acid rain problems in the Northeastern US starting 30 years ago, but the first attempt to put it into place for carbon emissions on a national basis in the US got sucked into political disputes and died an ugly death around 2010, so the most appealing market, a nationwide US system to join with Europe, remains unlikely to emerge anytime soon. We’ll see patchwork solutions, probably, for quite some time.

If you’re interested in being more speculative in this space, the little company Marin Katusa was touting a couple years ago, Carbon Streaming (NETZ.NO, OFSFT), is still out there — here’s what I said about them in a Friday File late in December (the story hasn’t changed much in the interim, and they haven’t reported their fourth quarter yet):

Remember Carbon Streaming (NETZ.NO, OFSTF)? That was pitched by Marin Katusa pretty vigorously for a while, they try to buy into carbon offset projects and earn a share of the carbon credits that those projects generate over time — carbon credits remain an interesting asset class, though the regulatory framework is not at all settled in the long term and there’s no real certainty about what those credits, whether voluntary or mandatory, will be worth in the future. I think there’s also probably a lot of junk in this market, with folks trying to generate “credit” for preserving carbon sink ecologies that would have been preserved for other reasons anyway, but at the right price it might be worth dabbling in this market.

Is this the right price? I don’t know, Carbon Streaming Corp. has made about 20 deals, buying into a dozen preservation and emission-reduction projects that they hope will generate valuable carbon credits in the future, most of which they would probably sell to companies who are trying to reach “net zero” goals… and the market is assessing those deals as having zero value. The company has about $73 million in cash as of last quarter, and a market cap of about $75 million, with no debt. That’s starting to seem like it might be worth watching.

I still think the voluntary “net zero” commitments and these still-pretty-unregulated carbon offset projects are not the best way to solve our emissions problems — It seems unlikely to me that we’re going to be able to meaningfully reduce carbon emissions without somehow monetizing those emissions and incentivizing emission reduction, maybe through a stricter “cap and trade” system… but I also would have thought that was the case 20 years ago, and progress has been very slow on that front. Maybe these voluntary offsets and credits and net-zero corporate priorities will eventually help to move the needle, or to create some value for Carbon Streaming’s investments in these emission reduction and carbon sink preservation projects. We’ll see… I haven’t invested, but if you value those projects at zero I’m starting to find them more interesting.

So, a few options for you… but if you just want to bet that we’ll continue to see sustained interest in real carbon credits in the regulated markets, particularly Europe and California, or that these will build into something global, then getting exposure to carbon futures trading through the KraneShares Global Carbon ETF (KRBN) is your easiest and probably safest bet… and there are plenty of little speculative or more localized doodads if you want to sift through the riskier stuff. Robinson also teased a few specific companies that he thinks will benefit, mostly from the electric vehicle and battery storage transition, and I can follow up with a story on those if there’s interest… but I’ve taken enough of your time today.

Ready for carbon investing to become a big deal again, after a year when it has essentially sat on the sidelines while Europe has been preoccupied with energy security and Putin’s war? Think it’s too early to bet on big global action, or too late to speculate on the few real carbon markets that exist right now? Let us know with a comment below. Thanks for reading!