Are hedge fund ‘bubble’ bets naughty or nice?

More than a decade after Lloyd Blankfein, then-boss of Goldman Sachs Group Inc, claimed banks do “god’s work,” the finance industry still struggles to convince the public it’s a force
for good.
A new chapter in this debate has erupted in Europe where hedge funds and national governments can’t agree on what constitutes “good” financial speculation.
Funds who bet that the price of emission permits would soar in Europe’s carbon market, the world’s largest, say they’re forcing polluters to decarbonise, thereby helping the planet. “Greed can be a wonderful thing when it works for the benefit of the environment,” Ulf Ek, founder of hedge fund Northlander Commodity Advisors told Bloomberg Markets in August.
Indeed, carbon is one of the world’s best performing commodities this year. EUAs (European carbon permits) have outperformed even bitcoin since January. The price has increased almost five-fold since a low in March 2020. On Monday, carbon for December delivery hit a record of more than 75 euros ($85) per ton.
Betting that pollution becomes more expensive is more socially acceptable than that other popular hedge fund strategy of scooping up unloved oil and gas stocks.
Yet at a time when consumer electricity bills are rising and businesses are struggling with higher energy and carbon compliance costs, hedge fund windfall profits are politically incendiary. Why should they benefit from industrial companies and
utilities that must actually hold
and trade the permits to cover their pollution?
Calls for intervention to stem the influence of speculative traders in Europe’s carbon market have grown louder. Coal-reliant Poland reiterated that speculation must be curbed, while Spain warned in September that “a bubble on EU ETS is the last thing we need.” Denmark and the Czech Republic have made similar complaints in recent months, as have industry players.
The purpose of Europe’s carbon market “should be to combat climate change at the lowest possible cost instead of being a casino for hedge funds where a transfer of wealth from end-consumers to hedge funds is taking place,” Stromio GmbH, a German electricity supplier, warned in September.
Of course, there’s a long history of bashing financial speculators in Europe, and there’s no consensus about what, if anything, to do about it. The European Commission appears to want high carbon prices, as does Germany, where the new coalition government is considering a national carbon price floor.
But it’s unfair to single out hedge funds because so-called compliance entities — companies like utilities that are required to obtain permits for their emissions — also have big carbon trading desks. Plus, “speculators” pursue a variety of strategies: Some might use leverage and trade short-term while others have a multi-year buy-and-hold approach.
Recent fluctuations are certainly worth keeping an eye on — the price has surged more than one third since mid-October.
However, Europe should resist tampering too much with a market that’s finally working as it’s broadly supposed to.

—Bloomberg