Animal Spirits Podcast - Talk Your Book: The Biggest Short Squeeze of All Time

Episode Date: January 23, 2023

On today's show, we are joined by Luke Oliver, Managing Director, Head of Climate Investments, and Head of Strategy at Kraneshares to discuss the biggest short of all time, how emissions are related to political risk, what drives carbon price, and much more!    Find complete shownotes on our blogs... Ben Carlson’s A Wealth of Common Sense Michael Batnick’s The Irrelevant Investor Like us on Facebook And feel free to shoot us an email at [e-mail] with any feedback, questions, recommendations, or ideas for future topics of conversation.   (Wealthcast Media, an affiliate of Ritholtz Wealth Management, received compensation from the sponsor of this advertisement. Inclusion of such advertisements does not constitute or imply endorsement, sponsorship or recommendation thereof, or any affiliation therewith, by the Content Creator or by Ritholtz Wealth Management or any of its employees. Investments in securities involve the risk of loss. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. The information provided on this website (including any information that may be accessed through this website) is not directed at any investor or category of investors and is provided solely as general information.) Learn more about your ad choices. Visit megaphone.fm/adchoices

Today's Animal Spirits is brought to you by Crane Shares. Go to cranechairs.com to learn more about their climate suite of ETF funds. Again, that's cranechairs.com. Welcome to Animal Spirits, a show about markets, life, and investing. Join Michael Batnik and Ben Carlson as they talk about what they're reading, writing, and watching. Michael Battenick and Ben Carlson work for Ritt Holtz wealth management. All opinions expressed by Michael and Ben or any podcast guests are solely their own opinions and do not reflect the opinion of Ritthold's wealth management. This podcast is for informational purposes only and should not be relied upon for investment decisions. Clients of Rithold's wealth management may maintain positions in the securities discussed in this

podcast. Welcome to Animal Spirits with Michael and Ben. Michael, a couple weeks ago, I was talking with some people in the family about things getting warmer. And it feels like it's warmer in the winter here. And I half jokingly said my biggest hedge against climate change is, is holding real estate in Michigan because we have all this water around here and bad winters keep people away. If it's going to be warmer, people are going to want to live in Michigan in the future.

What do you think? 30 years, Michigan, hot real estate market. Oh, I misunderstood what you're going with this. So it's like, wait, if people don't want to go there, it would make it price lower. I get it. Okay. If everywhere is getting warmer

and the oceans are going to flood Florida and California is going to fall off the map from an earthquake, Michigan. Well, I will say, so what's a date? It's February 17th. I'm looking at the 10 day. It's 44 degrees outside. January 17th. What did I say?

February? Yeah. Where's winter? Good question. So we've talked to Luke Oliver before from Crane Shares about the carbon markets, and he had a good take here. And it's funny because first we had ESG, which was a backlash against pollution and fossil fuels. And then you got a backlash to ESG, which was people saying, no, it's gone too far.

It's too woke. It's ruining things. And now the backlash to the backlash to the backlash to the backlash to the backlash. I don't know what we're in the third derivative of backlash is kind of like, okay, fine. You don't have to have these thoughts from a values-based perspective, but whatever you think of it, here's what's coming based on how governments are acting and based on how these markets are being formed. And that's what we get into with Luke today is forget all of your squishy feelings about

climate and whether you think it's happening or whether you think it's a hoax. Here's what's actually happening with the markets that are being created. And here's what real companies are doing with their money. And here's why it matters to what's going to happen coming down the plate in terms of climate change. Fun conversation. You made a nice little joke at the end. Marissa.

You said, are we closer to 2050 when we are to 1990? He took it as a real question what climate. Well, check my math. What's the answer? Yes, we're closer to 2050 to 1990. Jeez. Can you believe how old we are now that time's moving forward? This is what happens when you get old.

You think of stuff like this. Oh. All right. Here's our talk with Luke Oliver from Crane shares about climate investing in their suite of products on this. We're rejoined today by Luke Oliver. Luke is the head of climate investing for crane shares. Luke, welcome back.

Thanks for having you back. I saw a chart this morning that I might have to fetch. I don't know if I could find it, but the chart was this. Number of mentions of ESG on earnings calls. And that chart has gone from the lower left to the upper right to the point that there's, I don't know if a backlash. Well, there's a bit of a backlash. That's fair.

So we're talking today about crane shares. climate-aligned suite of ETFs. So maybe let's get the elephant in the room out of the way. What is this? Are we here to make money? This is an ESG thing. What's going on with the suite? Well, there's a great question. And a lot of advisors and clients we meet, about 50% of them come from the mindset that maybe there is a backlash against the ESG. ESG, they think is nice, but it's not about investing. The good thing about the suite that we've built to service climate investing is exactly that. We're not using the word ESG in our climate suite. Our climate suite is a suite of products that will give you investments into markets that will benefit

over the next 10, 20 years as the global economy is reconfigured and essentially goes green. But this doesn't rely on you wanting to go green. This doesn't rely on your beliefs on climate change, on green energy. This is all about where the capital flows are going and where they will need to go and how you monetize those opportunities. time about some of the carbon offsets, what other markets are developing that you're investing it? The carbon markets, two broad markets. There's the voluntary markets or the offset markets where someone's growing trees or capturing carbon, and that creates a carbon negative certificate, if you like, that can then be sold to companies that are looking to go carbon neutral,

even though they can't actually reduce their emissions. That's the offset market. So I'm going to park that. We have an ETF that tracks those markets, the tick as K-S-E-T. What I will say about those markets are you've got lots of different issuers, lots more unknowns. That's arguably a riskier, more emerging or frontier-type market in the carbon space. The other product where we've got most of our assets is the compliance markets. And what the compliance markets are is really it's just regulation. It's various markets, the European Union, California, various provinces of Canada, 11 states in the northeast of the US, you name it, UK, China, these programs are taking over the world and what they are are government caps on emissions, and then there's a cap and trade

where they sell those permits to pollute. And that's become a very lucrative market. It's a huge market now. It's almost a trillion dollars in trading through the futures market. And so it's a real asset class, and it's got all of these benefits of being a new asset class, correlation, the expected performance. And the key is that these caps are designed to reduce emissions in these economies. They're fully backed by what I call the central bank of carbon. So the European Commission is engineering, all these countries are engineering their climate targets by reducing emissions. And they do that by making these allowances more scarce and more expensive. So you can actually belong the policy tool that is fully backed by these various governments

to bring up the price of carbon in order to reduce the amount of carbon emissions. So it's a really unique opportunity. We're going to spend the bulk of this conversation talking about the investing opportunity. But before we do, what's the problem with carbon? Why are we trying to limit the amount of carbon emissions that are in the atmosphere? This is one of these things where people want to argue about it and debate the reality. But here's what I think is really important. And I haven't heard enough people saying this.

Everyone's heard car exhaust, carbon dioxide emissions when you burn coal at power stations, make electricity goes into the atmosphere. And that is causing the atmosphere to warm. And if the atmosphere warms, we're going to lose our ice caps, which are also good at reflecting the sun's light and therefore the heat back into the atmosphere. We're going to have disruptions to every ecosystem, every weather pattern. and that is going to be incredibly dangerous. Sounds like a Gerard Butler movie.

It could be. He's in a helicopter and trying to save the queen and she's freezing or whatever it was. But here's the thing. Everyone's saying, I don't believe this. It's really not debatable. What's missed in bridging the gap between the beliefs and don't believes is that no one's saying the temperature is going to swing wildly. We're talking about, on average, a couple of degrees. That couple of degrees that we would hardly notice is just enough for ice to melt.

in the summer in certain parts of the world is for certain insects, biological cycles not to work, and then we start to get all these imbalances. So I really want to stress that. No one's saying a massive change in temperature is going to come, but a small average change in temperature will have massive issues, and there'll be these tipping points when these things really start to go wrong. So I don't want to be that guy beating this drum, but it's so impossible to ignore. And what we're talking about is a tiny, almost a doubling in the amount of carbon dioxide from about 200 parts per million to 400 parts a million. Again, only a small change. Humans have only had a small change, but that's enough to capture just a little bit more heat. And if we do this, we're going to

have massive disruption. But why is this about investing? Well, those changes are going to cause massive geopolitical and economic impact. If we start having millions of refugees from other parts of the world, if we start to have certain supply lines in the US underwater, you name it. There's so many economic factors that spin off of this slight changing temperature, the whole world, governments, corporations are all re-engineering their supply chains and their target markets in order to protect themselves against this change. So that's where the money is. Money is moving. And like any good investor, we want to be where that money is moving to, capitalizing that. How do you think about the political risk in the situation? Because I would

assume at first a lot of this money would have to come from governments, but maybe I'm wrong there and the corporations are going to try to step in and solve these problems. How do you think about that between the politics of it versus just the capitalism aspect of it? This is why carbon compliance markets, they're the marriage of those two things. The governments have created the cap and trade program, which sets the bar. They've put a price on carbon. Now we have a price on carbon. The corporations have a choice to either pay that carbon tax or innovate away from producing

carbon. And so you create this free market price for carbon. And where it isn't free is where it's regulated. In the same way the Fed regulates liquidity in U.S. dollars, you've got this central bank trying to get the price of carbon higher, but it's really up to the corporations. The corporations, if they do nothing, the price of carbon is going to the moon. If they decarbonize, which is the point of this, they will slowly balance the demand supply. And in theory, to your question, political risk, it's lowered because we're actually bringing

together the governments and the companies. A anecdotally, a lot of these countries that do not like putting a price on carbon, like Poland, they really like getting these checks from the carbon program when they auction the new allowances. So they're addicted. If they got rid of this program, they'd lose the checks that they're getting. This program's raising billions every year for the European Union to spend on moving away. So it's not all stick. It's carrot and stick. And then the corporations, even some of the energy companies are saying, we wouldn't mind a higher carbon price because some of these green inventions we've made aren't economical at these prices. But if carbon becomes $120, well, then

I'll be able to start selling this as a cost saver. That's a green cost saver. So it really is the perfect marriage of capital markets and regulation. And that, I think, is our sweet spot. Inside of this ETF exists these contracts. Are these futures contracts? Are they but from the primary dealers? Are they bought in the secondary market? What is actually going on here? Quick summary of how it works. So the European Union sets a cap of 1.6 billion tons of carbon. is allowed to go into the atmosphere from Europe. And then a little bit like how we all do our taxes, all the companies in Europe have to go through a process of recording

their inputs and outputs and how much emissions they had. And then they have to deliver to the European Commission each year the number of allowances. So if they had 50,000 tons of pollution, they have to buy 50,000 of these allowances. So the allowances, just so makes sense, you reduce that cap every year. And that's how you get down to your target. Wait, said that one more time, the allowances, I would think they go up,

But you're saying they go down? No, no. So the number of them go down. The companies need to decarbonize or by the increasingly scarce allowances. So the European Commission engineers the supply down in order to reduce emissions. And the transmission there is that the price goes up. As you reduce supply, the price goes up. As companies try and decarbonize, in theory, demand is going to come down as well.

But the structural deficit there is that there will not be enough allowances. for all the pollution that's happening now. And so we're going to force the price of carbon up as it becomes more scarce that will force companies, not only force them to switch to greener fuels, but it's also going to force these companies to say, we need to start investing money in decarbonizing, otherwise we're going to go out of business with this price of carbon increasing. There's the reward that if you reduce your offsets, you can reduce your costs, and if you don't, you could get punished by an increasing cost of carbon. But what I like about it, and any free market or or libertarian thinking people would like,

no one's saying to companies you're not allowed to pollute. This is sort of capitalist market approach. You can plute all you like, but you're going to have to buy these allowances. And so keep doing that if you want, but if you want to actually reduce costs and be competitive in the future market, you should start to decarbonize.

So it's all the invisible hand rather than direct. No one's making laws against omitting, it's simply making it more economically attractive to be more efficient with carbon output or emission. What does drive the price? Because there's no cash flows here. I guess there are cash flows that are on the other side of this from the company's point of view. But when does a contract become too rich or a good deal? What's the dynamics of this market? And that's a great question because a few people have said, well, what is it? And they think about commodities or they think about other

esoteric things. There's no cash filing here. But the value of one allowance is the economic value of being able to produce one ton of carbon. So you could go really, if there was any one industry, just energy production, the value of carbon would be somewhere between the cost of a coal, the cost of running the power plant, and the profit margin on selling that fuel. So it would become another input into production for all of these companies. There's something quite neat. There's something called the marginal abatement cost curve, which is the price at which each ton of carbon in the global economy could be removed if the price of carbon traded there. That goes up. Goldman Sachs puts this together. They have the high-end price.

$1,500 a ton. Carbon compliance is trading about $45 a ton right now. So a massive upside to that number. But you don't want it moving up to that number now because if it moves up there too quickly, then the companies won't be able to afford to operate paying $1,500 a ton of carbon. What you want to happen is as you move up this marginal abatement cost curve, all the industries along that curve are innovating and moving away from burning fossil fuels. This is a really happening. Take Fortescue's the mining company in Australia. They're producing out in the Australian Outback. They've got solar and wind, tons of it. And they're creating green electricity in the Australian Outback to create green hydrogen. And then they'll ship

green hydrogen in the same way they've been shipping iron ore for the last hundred years. And suddenly you've got an old mining company. This goes into the equities that we think you should hold as well. You've got companies that today, low value stocks, don't look very interesting. Certainly ESG people wouldn't touch them. But we think that's the greenest, most impactful thing you can do is buy a company that is about to completely reinvent themselves as a future leader of green energy. Well, that's probably a good transition into your paper you put out to the end of the year. You said the biggest short carbon markets and energy transition. What are we shorting here? The typical old energy industry? Well, no, exactly not that. That's interesting.

So there's three things we think you need to do. We've built our platform exactly in this way. One, you need to be along the carbon markets. Carbon markets reflect tightening regulation, tightening appetite to reduce carbon emissions. These are things that are backed by the Inflation Reduction Act, Europe's 55. This isn't us wanting these things to happen. This is things that are happening that we can capitalize and monetize if we invest in these markets. That's why we're there. Number one.

Number two, if that's going to happen, if you're going to put a value on innovating away from polluting, then you're going to have all this innovation. It's been a whole gold rush in equity markets and in development of green solutions. You're going to have a lot of companies that are either creating new solutions and they might look like startups. That's what a lot of people are looking at. Oh, I need to buy the company that's making a better solar panel. Good idea.

That makes sense. But those look like really growthy, high-valued companies. The real companies that we think are the most interesting are some of the legacy energy company. So we're not saying ignore ESG by energy companies. We're saying ESG in spirit makes a lot of sense. But where we think the investment makes sense is where the most impact is. And another way to look at that is companies that are actually making change

that will in the future maybe look like nice ESG companies. These old school energy and oil companies are going to be incentivized to change the way that they do business. And you think they're well positioned to make this transition? Yes. And not all of them. them. We're not saying, oh, people are buying green companies that are all growthy and overvalued. We're going to buy energy companies because they're cheap but undervalued. We're going to look at all the energy companies, say, which of these companies is increasing

green capex, which have really solid plans to go into the cocoon and come out as a butterfly on the other side of this. So certain energy companies are not doing a good job of this. We won't go near those. But we're happy and proud to own companies that look dirty today, because our research shows that these companies will be very green in the future. And it's not just about them being green, it's about the money they're going to make. When their valuation goes from a low single-digit mining company to the modern leader, the Exxon of green carbonless fuel in the future, that valuation is going to be incredible. Luke, please tell us who that's going to be.

I'd appreciate that tip. We've got about 30 of them. If you buy the ETF KGHG, you'll get them all. And you'll see some big names in there. You'll see some smaller names in there, but you'll see a lot of chemical companies, energy companies, mining companies, and it's just you get a lot of companies that are going through this process at the moment. What's the investing process there then to pick these companies? Do you have certain things you're trying to quantify where people have to hit certain hurdles or benchmarks or investment dollars or is it more qualitative at this point? What are you looking at? It's bottom up research. We have Roger Mortimer, who's extensive history in these markets and also actually worked in. some of these companies over his career, and he's picking this basket. We narrow the field by saying,

you know, who's got increasing green capex, who's reducing their carbon footprint. But almost nothing you can pull from their financial reports will tell you whether they're better than the next company. You really need to get under the weeds and get to know these companies and really figure out which companies are going to break out of the herd. And to your question, which one or two will it be hard to tell? But we have a portfolio of about 30 of them that we think are very good for this. of these credits? Is it primarily energy companies or are there others involved? Getting back to the carbon credits, government issued, they're all identical and fungible within

each market, completely regulated, completely transparent. They have a tangible value, which is that economic value we talked about before. It's not worth as much as someone's willing to pay. It's worth for every company how much it costs them to do business. So who's buying them, major corporations in each of these markets? If you're a California-based polluter, you're going to the California auctions to buy these, and then you're buying them additional in the secondary market. There's also in any good futures market, you've got speculators. We put ourselves somewhere in the middle in that we are strategically long, and by being strategically long, one, we're supporting these markets, participating in the liquidity. But mainly, I think we're

adding to the price discovery. And the sooner this price reaches higher levels. I mentioned we're averaging about $45 a ton. We need to get well over $100 a ton for this to really start. reducing pollution. The TF's been around about two and a half years, summer of 2020 at launch. Is it more volatile than you thought it would have been? Any surprises here? It looks like there was a very significant price drop overnight. What's the story there at the end of December?

A few things. One note is exactly as volatile as we thought it was about twice as volatile as equities, but from a correlation perspective, low correlations to almost every market. Like to equities, it's 0.3, 0.3, give or take. and even the individual components are low correlation to each other. But as for performers, there was a big drop in March on the Russian invasion, which was just worth noting because it was a technical sell-off to do with some of the Russian liquidations before they got kicked out of SWIFT.

But the low correlation, I say that, to say that you can't escape massive geopolitical risk to cause volatility in this asset class as well as others. But the correlations with the exceptions of very short periods have remained very low. say if you have to hunt for ways to make it correlate, it doesn't correlate. The sell-off into year-end was essentially a couple of things happened. We had a lot of clarity from both California and Europe on their policy for tightening the markets going forward. Both of them very bullish tightening. Europe is introducing some supply to help pay for grants to get away from European energy, but they're going to fund that from future auctions. So it didn't increase supply

in the net, which was very well received. But then we've had this surprise, warm summer. I'm not going to blame that on climate change just yet. But warm summer, less power needed to heat homes. They've got really lucky. So Europe had managed to build up their net gas supplies. And then the whole question was going to be, do they end up blowing that with a cold winter? And they've been very fortunate in terms of geopolitical risk that the winter's been mild. So they haven't needed to burn up their natural gas supplies. So short term, bad for carbon, because people aren't polluting. And that's why if they were polluting, carbon would probably be higher. So I'm not suggesting we want them to pollute, but I'm saying that the weakness in carbon is because they haven't polluted

because of the weather. I'd rather them not pollute because they'd invented a new mechanism that was more efficient, but it's just because they haven't needed to burn that fuel. So as that comes back, I think that short term is bad and we're seeing that priced in. Going forward, though, that means Europe now has its stockpile of natural gas, which makes it a lot less sensitive to Russian massination. So I think we're actually in a better place moving forward than we were. I don't know we're talking this morning, actually, about Europe and the winter of people burning their clothes to heat their houses. And I said, obviously, that's not a joke, but we don't know anything about what's going on over there. Can you just help shed some light on the

situation? Because clearly, it's not as bad as maybe people thought it might be. Can you just explain the dynamics? I can't speak to what any individual family is doing in one of the numerous countries in Europe. But we went into the winter with Europe having restored most of its natural gas supply. I think they had 90% of their inventories up, which was a very strong start. And everyone said, well, they got lucky because they were able to get more gas from the Nordics. They also had this mild fall, which meant they didn't need to use as much. But wait till the winter comes and now we'll see whether the emperor's got any clothes on. And we've been fortunate to have a mild winter. That's created a lot of stability in Europe.

You saw a headline the other day that they've got new natural gas supplies. They've renewed some of the nuclear power for longer. So they've taken steps to get away from Russian fuel quite quickly and decisively. So that really does take some of the bite out of what's happening. And I think that means we've got less geopolitical risk because it doesn't change what Russia can and might do, but Europe isn't under the thumb of needing this precious natural gas supply. Does that mean that if the war were to miraculously come to an end tomorrow, then the energy markets have kind of moved on a little bit.

Would it have as much of an impact as maybe we would have thought of the beginning? It's moved on, but I think everyone would be much happier to have cheaper, easier fuel like they'd had. That's probably why they're addicted to it in the first place. But this has also amped up. No one wants to be in that position again. And so I think they're going to keep pushing through regardless. And also, when has peace ever broken out, it's always a long, slow story.

So I think we'll get significantly away from Russian energy. That will make these programs a lot more stable. And if you had any material change in demand for carbon allowances, they can always, in the next layer of policy, tighten the market up more. So this is a market that's free floating, but it's got a guiding hand pushing it higher all the time. It's a very rare scenario. You get to be long that thing.

Don't fight the Fed, but this is even more direct. Rather than I think the Fed's going to ease, so I want stocks, because if that money goes into stocks, stocks will go up. this is literally you can be along the thing that they are trying to engineer higher in order to reduce emissions. You all at Crane Shows have a paper either out or coming out. Can you tell us what some of your findings are in that? The paper we just put out was on the biggest short and we drew similarities to the big short.

And the real similarity here is that a very small number of people were able to see the housing bubble and we're able to go and put the trades on. did very well. This time around, we see that for the last 150 years, there's never been a price on carbon, suddenly or has become very urgent because of how exacerbated the issue is that we're now starting to put prices on. In fact, the last 10 years, but only now is this policy kicking in. So we're going to start seeing this change. So we know there's going to be a huge amount. The number is about 130 trillion over the next 20 to 30 years. A lot of that's going to be front-loaded is going to go into revamping the entire global economy. So you absolutely have to

figure out a way how to be along the markets that are going to get that tailwind. And as I said, it's the carbon markets. It's the transition equities that we have in our equity fund. And it's also the commodities that those guys are going to use like lithium, cobal, and we launched a fund KMET that takes care of that last piece. So the finding in the paper was there's a massive opportunity here for investors to be in front of the biggest capital cycle that's ever happened. There's never been this much money, even on a inflation-adjusted basis, ever spent on anything. And a lot of people are not participating because they think it's a woke thing. This is a pure investment thing.

And then our paper coming out this month will be on The Outlook, but I hopefully I'm covering why we're so optimistic on it. Why not call the Big Long? What's the short here, unless I'm misunderstanding. Yeah. Michael Lewis wouldn't have sold nearly as many copies if he called the the big long. That's it. That's partly it. We're referring to something. But listen, there is a short, but the short is we have been pumping carbon into the atmosphere for 150 years,

hundreds of millions and billions of tons of carbon and never paid for it. So it's kind of like an uncovered short. You've shorted the carbon. Now it's going to destroy the planet. And I know people hate when people make those statements like that, but it's going to cause a real problem. So we need to buy it back. And it's like we've got the naked short and we've realized that we have to buy this thing back. And where is the price going to go when that short squeeze? So to me, it's the biggest short squeeze of all time. We have to stop putting it into the market and then start buying back what we already put into the market. And that's the short squeeze. So with that long-term thesis in mind, and you kind of see where this is heading, if you had to think, obviously some of the reactions

are going to be hard to predict, but what are some of the unintended consequences? I think through this transition, and I don't know how long it's going to take, whether it's decades or just years, but is this the kind of thing where there won't be enough investment going into fossil fuels anymore, so will the price of oil shoot up as we go through this? Are there going to be weird things like that can happen that you could consider that would be unintended consequences of, yes, we're doing a good thing for the planet, but in the meantime, things are going to get really funky in some of these other markets? That's one of the flaws of the ESG approach, or it's one of the flaws that the backlash on ESG is focusing on. With our products,

You never have to answer that question because by being along companies, so on the equity side, we're happy being along some of those energy companies, knowing that they are going to be some of the innovators. You need to support those industries, but not those that are willing to become the Blockbuster Videos. We need to find all the things that look like Blasbster Video, which one is running Netflix in the background and getting ready to launch and spin off the new Netflix. We've got to be very selective. And then being along the carbon markets, it's just.

just so clean and on point. We're not looking for some second derivative. Like, oh, if inflation goes up, I should buy commodities because commodities are what cause inflation. So with carbon, it's the first order. This is the European Commission, California Air Resource Board, the northeast of the U.S. include New York, New Jersey, Pennsylvania. We're not Pennsylvania yet. The whole eastern seaboard north of Washington is in this program. This is the asset. They are making these things more expensive in order to reduce emissions. And we can be long those and participate in the price discovery. How does this go wrong?

You're making a good case, but there's no such thing as risk-free investing. So how does this thesis fall apart? How does the price not work? Ten years from that, what would have happened to happen? I know you can't know, but if you had to guess. So I think there's three things. If we have the two I talk about all the time, we sort of touched on a really political risk. If European Commission decided we're not going to do this thing anymore, we just decided we're not going to do this anymore, or we had a big political swing where the party that doesn't believe in climate change wins and they somehow try and remove the program, that's going to put risk into the system that what if this just goes away or they oversupply and it causes the price to sell off.

So that exists as a risk. I think we've seen that proven now that that's not a material risk in that Russia-invaded Ukraine, pipelines exploded, delivering natural gas into Europe, and Europe was looking at a pretty bleak energy picture, and they didn't pump the brakes on the program. They've reconfigured it ever so slightly, but they've doubled down on committing to hitting energy targets, even in the face of that invasion. So I think the political risk is pretty low now. The other big risk is innovation risk.

about this one a lot because the program, the higher the price goes, the more you're incentivizing companies to find smart ways to create their product, create electricity without pollution. What if you're really successful and all these companies, this company in Australia I mentioned, suddenly ships green hydrogen and everyone figures out how to use the green hydrogen efficiently and we don't need half the emissions anymore. Well, yeah, that will cause volatility. If people innovate too quickly, which is a good thing, it could cause a reduction in demand for these allowances. So the good news is, just like the Fed can raise or cut rates, the European Commission could say, the cement industry just solved their pollution problem. That was really

great. We got the price to 100. They solved pollution problem. But now the price is back down to 90 because people are pricing in that they don't need to buy emissions anymore. The program can say, okay, well, the model changed. Now we can tighten or we can ease. And so whenever you get volatility from an innovation, I think you're going to get that back. That makes sense. The scenario you just laid up makes a lot of sense. I hope so. I see that you get volatility. There's no doubt this will be volatile.

So there is risk inherently in that. I think the political risk is quite low. I think the innovation risk, unfortunately, it's lower than it should be. But even if we have success there, you stay the course. The market's going to get tightened up. Now, if you think about over time, I hate to draw similarities to this a certain thing that you can probably imagine. But as there's fewer of them, I think their prices will get much higher. If you understand this.

Yeah, but I think some people might say, well, does this mean then that the liquidity dries up is the problem that they work really well, but then in five years, there's no liquidity because these things have dried up because there's only a fraction of the amount. One, the targets go out to 2050. Two, I think that instead of trading one ton of carbon, for the future, it's a thousand tons of carbon, those numbers will come down. So in the same way, you remember, no one trades the S&P futures anymore. We all trade the Eminis, because the, S&P got so big, they had to bring out an e-mini that was more liquid and tradable. So I think the same thing could happen here down the road, but we would manage that inside

the fund. You guys don't need to worry about that. But I think that you'll get much higher prices of carbon, but maybe you're trading half a ton of carbon instead of a full-time. And that's how the liquidity profile will stay consistent. Look, this is great. You had a good time? Had a good time, yeah.

I hope people are at least making a note in the corner of the pad, because when you hear about carbon up 20% in Jan Fed much. This is something people should have in a portfolio. It doesn't correlate to anything else. I've had people say to me, oh, I've got carbon in my equity portfolio because like 20% of the S&P, your energy companies. That's not. You don't.

Your long energy companies. Arguably, these guys are short carbon because they have to buy these back to the big short analogy. So you've got something that is engineered to be significantly higher. So I mentioned $45 a ton, give or take now globally. We think that number is well over 100 in the next couple of years and doesn't correlate with anything else. And it's almost a hedge to the inflation.

It's a hedge to the drag that this might have on companies as it gets developed. So I really hope some of this sticks because it's the story people don't know they haven't heard about yet. It's a good one. So, yeah, I appreciate you. We'll include some links to your research. Where should we send people to learn more about the funds? crane shares.com, you'll find it all in there. You'll see both of our major suites. E.M. and China is a big focus. And then tackling these climate investments is our other key focus. And that's where you'll find me. Great work, Luke. That's a pretty good hedge, actually. China's doing all the pollution and climate is trying to solve it. Yeah. It's not as ironic as you think, actually, because why often get that question? Oh, China's not into... They're actually very focused on it, but it's inconceivable for them to start reducing emissions. Whereas the rest of us have hit people.

They're actually reasonably, I think, set a 2030 peak, and then they'll catch up with the rest of us by 2050. They're on side. China's very much on side with the economic side of this. And I think maybe that's also another tell that this is Karen Stig. This is economics and not a feel-good story. This is a real investment. Are we closer to 2050 than 1990?

We're not too far off. We're on target. California was ahead of that target. I think that those targets might be okay, but those targets, don't translate to the right temperature. They're trying to keep the temperature increase to one and a half degrees. And I think we blew that. I think we're going to blow that.

I don't think there's any way to turn the ship around before that. So now we're talking, is it two? Is it two and a half? And as I said, I understand what people think, well, what it means we'll have summer in the winter. And we know it can change 20 degrees in a day. We're just talking about this couple of degrees, slightly warmer through certain seasons. will mess up a lot of biosystem. Well, that's depressing.

Potentially very depressing, but at least be long. I mean, even here's another way of putting it. If you're skeptical on all of these things, but you want to be hedged against it, it's these products. They're not outside. They're not doing anything you don't fundamentally disagree with, and they're long the capital moving. Now, I think that's the way to talk about it.

If everyone else believes it and you don't, this is your hedge. Be long where the money's moving and the regular. regulations happening. Don't fight the Fed, I guess, is the phrase to kind of apply to the price of carbon. Luke Oliver, ladies and gentlemen. Thank you so much. Appreciate it. Thanks, Michael. Thanks, Ben. Thank you to Luke. Thank you, Crane shares. To learn more about the risks and investing in carbon and the opportunities, go to crane shares.com. Thank you.