An introduction to the correlation of EUAs with other assets

European Union Allowances (EUAs) are an excellent option for portfolio diversification. Historically, they have had a low correlation with other asset classes, offering effective protection against unfavorable portofolio swings coming from the broad financial markets.

Carbon allowances have a unique structure as they combine elements of a policy tool and a marketplace. Thus, they are less sensitive to major traditional asset fluctuations.

Unlike most investing options, EUAs can act as an inflation hedge. Indeed, a significant contributor to inflation is often the energy sector. As energy prices increase, inflation rises. Likewise, EUA prices often follow suit when energy sources such as gas become more expensive. In short, EUA prices can be positively correlated with inflation, and carbon allowances can help compensate for the loss of purchasing power due to rising inflation.

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Although carbon prices can fluctuate temporarily and have variable correlations with other assets, EUAs are distinguished by their expected long-term price appreciation, thanks to a decreasing supply.

As both a policy tool and a financial instrument, carbon allowances are engineered for a steady price growth. Also, their historically low correlation with most asset classes makes them a valuable addition for any well-diversified portfolio.

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