Analysis of Carbon Tax and Carbon Credit Concept Stocks: What Are the Investment Opportunities in the Carbon Market in 2024?

As the global net-zero target trend accelerates, the carbon trading market has become an emerging investment hotspot. The Taiwanese government announced the establishment of a domestic carbon trading platform to support the 2050 near-zero carbon emission vision. This policy shift has brought unprecedented growth opportunities for stocks related to carbon taxes and carbon rights. What exactly are carbon rights and carbon taxes, how do they operate, and how can investors seize the opportunities within them?

The Core Logic of the Carbon Trading Market

Carbon rights do not come out of nowhere; they are allocated by the government to enterprises and organizations based on total carbon emission control targets, according to established rules. Simply put, carbon rights represent the rights to emit carbon—legal permits required for emitting a certain amount of greenhouse gases (mainly carbon dioxide).

The government issues annual carbon emission allowances, transforming environmental costs into market trading tools. Companies exceeding their emission caps need to purchase carbon rights to cover the excess, while those that stay within their limits can sell their surplus allowances, creating a market full of trading opportunities.

The Dual Model of Carbon Tax and Carbon Trading

Countries worldwide adopt two main economic regulation methods for carbon emissions:

Carbon Tax Model: The government directly levies taxes per unit of carbon emission, based on the amount of CO2 emitted per ton. Countries like Sweden and Finland raise funds through carbon tax policies for environmental protection and renewable energy development.

Carbon Trading Model: Governments or international organizations establish carbon markets, regulating emissions through allowance distribution and market trading mechanisms. The European Union Emissions Trading System (EU ETS) and Canada’s Greenhouse Gas Emission Trading System (GHG ETS) are typical examples. Australia adopts a hybrid approach, utilizing both carbon pricing and trading mechanisms.

Investment Dimensions of Carbon Rights Stocks and Carbon Tax Stocks

Carbon Rights Stocks generally refer to companies directly involved in operating carbon trading markets or benefiting from carbon allowances due to low emissions characteristics. Carbon Tax Stocks are more related to companies affected by carbon tax policies—these companies may need to transform due to increased tax costs or benefit from investments in clean technologies.

Direct Beneficiary: Tesla’s Carbon Rights Revenue Miracle

The most well-known case of carbon rights income is Tesla. Due to its emissions being far below EU standards, Tesla receives large amounts of additional carbon rights annually, which many traditional fuel vehicle manufacturers purchase from it. Between 2018 and 2022, Tesla’s carbon rights income grew more than fourfold, becoming a significant part of its profits. This illustrates that low-carbon enterprises can not only save costs but also earn extra revenue through the sale of carbon allowances.

Diversified Paths of Taiwan’s Carbon Rights Stocks

In Taiwan’s carbon rights market, different companies participate through various methods:

Afforestation Carbon Rights: Forestry companies like Huashui(1905), YFY(1907), and Agriculture & Forestry(2913) increase carbon sinks through reforestation, converting these sinks into tradable carbon rights;

Carbon Capture Technologies: Companies such as Taiwan Cement(1101) and Taisun(1710) adopt technical methods to directly separate carbon from air or industrial exhaust gases, storing or reusing it to reduce emissions;

Green Power Generation Sector: Yuanjing(3576), Ta Chen Steel(2002), and others generate electricity via solar, wind, and other renewable energies, completely avoiding carbon emissions and indirectly gaining advantages in carbon rights;

Carbon Footprint Support: Zitong(3044) and Re-Yang(8076) provide carbon footprint calculation and decarbonization solutions, helping enterprises manage emissions precisely.

Key Factors Influencing Carbon Emission Pricing

Price fluctuations in the carbon market are driven by multiple factors:

Policy Cap: The cap on carbon emissions determines the total market allowances. Lowering the cap means reduced allowance supply, often leading to higher carbon prices.

Economic Costs: Energy prices, production costs, and market competitiveness influence companies’ decarbonization investment decisions. When energy prices rise, companies tend to buy carbon rights rather than invest in costly emission reduction upgrades.

Supply and Demand: The demand and supply of carbon allowances directly determine prices. When demand exceeds supply, prices rise; when supply exceeds demand, prices fall.

Long-term Factors: Technological progress, the pace of energy structure transformation, and the stability of climate policies collectively shape the long-term trend of the carbon market.

How to Build a Carbon Rights Investment Portfolio

Investors can participate in the carbon trading market through multiple approaches, each with pros and cons:

Stock Investment

Directly purchasing stocks of carbon trading platform operators, environmental technology companies, and clean energy enterprises to share the growth benefits of the carbon market. This method is easier to understand in terms of company fundamentals but requires stock selection skills.

Carbon Rights Funds

Professional fund management companies operate carbon rights funds, offering diversified portfolios that allow participation in the carbon market while spreading risk. Investors only need to buy fund shares to gain professional management.

Carbon Rights Index and ETFs

Tracking carbon emission indices through ETFs provides a window into global or regional carbon rights price movements. For example, KraneShares’ European Carbon Allowance Strategy Active ETF (KEUA) and California Carbon Allowance Strategy Active ETF (KCCA) are tools that can serve as stock selection references.

How to Precisely Select Carbon Rights Stocks

Fundamental Analysis

Assess a company’s carbon emission levels and allowance holdings to determine its competitive position in the carbon trading market. Also, understand whether the company has clear carbon neutrality goals and decarbonization strategies—including R&D of low-carbon technologies, process optimization, and energy efficiency improvements.

Evaluating the financial stability of peer companies is also crucial. Look for steady revenue growth, profit performance, and reasonable valuation levels. Indicators like P/E ratio, P/S ratio, and market capitalization can help investors judge whether the risk-reward ratio is acceptable.

Technical Analysis

Observe stock price trends through charts, check for trendlines, support and resistance levels, and identify potential reversal or breakout signals. Use tools like moving averages, Relative Strength Index (RSI), and Moving Average Convergence Divergence (MACD) to quantify stock volatility. Pay particular attention to trading volume changes—abnormal volume spikes often indicate shifts in market sentiment or trend strengthening.

The Actual Impact of Carbon Trading on the Stock Market

Real Case Insights

2018 European Experience: When the EU implemented new carbon allowance supply restrictions, carbon prices rose sharply, significantly increasing the operating costs of coal-fired power companies. The resulting profit pressure was directly reflected in declining stock prices, exemplifying the impact of carbon policies on the stock market.

Tesla’s Demonstration Effect: In 2020, Tesla announced large-scale investments in renewable energy and clean technologies, driving its stock price rapidly upward. This rise not only reflected Tesla’s prospects but also triggered a market re-evaluation of investment opportunities in the clean energy industry.

Arbitrage and Hedging Strategies

Experienced investors can develop strategies based on changes in carbon trading prices and stock prices. If a rise in carbon prices is expected, investing in companies with competitive advantages in renewable energy can benefit from both policy support and market demand growth. Conversely, buying carbon allowances when prices are low and selling after they rebound can realize arbitrage gains.

Risks and Opportunities in Carbon Rights Investment

Opportunities on the Profit Side

Carbon rights stocks benefit from the global decarbonization trend and the policy dividends from Taiwan’s carbon trading platform. They are expected to see improvements in revenue, profit, market share, and brand image, attracting broad investor attention.

Hidden Risks on the Risk Side

Policy fluctuations, technological uncertainties, market demand changes, and industry competition may negatively impact corporate operations and cost efficiency. Market sentiment swings or speculative behaviors can also lead to excessive stock price volatility or bubbles.

Market Maturity Constraints

The voluntary carbon market lacks unified standards and regulations, resulting in high transaction costs; carbon prices are influenced by multiple factors and are highly volatile, making precise prediction difficult; differences in definitions and regulations regarding carbon allowances across countries may lead to legal disputes in cross-border trading.

Outlook and Recommendations

Investing in carbon rights stocks or carbon tax stocks requires a comprehensive consideration of multiple factors: focus on a company’s carbon emission levels, allowance holdings, clarity of decarbonization goals, and financial health; combine technical analysis to determine entry points; diversify risks through carbon rights-related ETFs; always keep risk management in mind.

The carbon trading market is still in its early growth stage, full of opportunities but also hidden challenges. Rational investors should fully understand market mechanisms, assess their risk tolerance, and only then seize the opportunities in the carbon rights wave.