2022 in Review: Carbon Allowances Investing | ETF Trends

Countries around the world are beginning to ramp up carbon emission reduction regulations, providing a strong opportunity for carbon allowances investing in the coming years as cap-and-trade markets tighten to meet net-zero emissions goals by 2050. In the challenging environment of 2022, advisors and investors moved away from broad diversification within the carbon allowances global market and instead opted for more targeted exposure to specific markets.

Carbon allowances have become an increasingly attractive option for diversification with advisors in a year of market hardships. An October poll of financial advisors by VettaFi found that 42.9% of respondents believed the diversification potentials of carbon allowances to be their most attractive quality for portfolios, followed by 22.4% reporting the alpha potential was most attractive.

The KraneShares California Carbon Allowance ETF (KCCA) had net flows of $172 million in 2022 and the KraneShares European Carbon Allowance ETF (KEUA) had net flows of $15 million in 2022 as of mid-December. Comparatively speaking, the KraneShares Global Carbon ETF (KRBN) had net flows of -$605 million as investors moved away from broad exposure to the European energy crisis bundled together with market challenges within the U.S. in 2022.

There is potential positive regulatory support on the horizon for both the California market and the European market. In California, the Air Resources Board is finalizing the 2030 Scoping Plan that reduces emissions cuts to net zero by 2045 for the state, and amendments are anticipated in the coming months to tighten the cap-and-trade market cap to align with the new targets.

On the European front, the RePowerEU plan that includes potential amendments to how auctioning of allowances will be handled to fund the energy transition away from Russia and towards renewables is expected to be settled by the end of the month. The resolution should bring further support for the market in the form of an increased transition to renewables and greater pressure on participating countries to reduce emissions after an increase in temporary coal reliance.

Investing in Carbon Allowances With KraneShares

The KraneShares European Carbon Allowance ETF (KEUA) offers targeted exposure to the EU carbon allowances market and is benchmarked to the IHS Markit Carbon EUA Index, an index that tracks the most-traded EUA futures contracts, a market that is the oldest and most liquid for carbon allowances. The market currently offers coverage for roughly 40% of all emissions from the EU, including 27 member states and Norway, Iceland, and Liechtenstein.

The KraneShares California Carbon Allowance ETF (KCCA) offers targeted exposure to the joint California and Quebec carbon allowance market. This includes California’s cap-and-trade carbon allowance program, one of the fastest-growing carbon allowance programs worldwide, and is benchmarked to the IHS Markit Carbon CCA Index. The CCA includes up to 15% of the cap-and-trade credits from Quebec’s market.

The KraneShares Global Carbon ETF (NYSE: KRBN) was the first of its kind to offer an investment take on carbon credits trading and provides exposure to major carbon markets worldwide. KRBN tracks the IHS Markit Global Carbon Index, which follows the most liquid carbon credit futures contracts in the world. This includes contracts from the European Union Allowances (EUA), California Carbon Allowances (CCA), Regional Greenhouse Gas Initiative (RGGI) markets, and the United Kingdom Allowances (UKA).

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