Europe’s carbon markets took heavy hits last year from geopolitical instability and strife, driving prolonged volatility and ending with the passage of key regulations in the EU that will have lasting impacts on the EU carbon market. There is a strong investment opportunity in European carbon markets. Though allowance prices currently remain slack from a mild winter, the longer-term outlook is one of tightening that is likely to lead to rising prices.
European Union Allowances opened the year trading at €84.01 (USD 90.89) and reached new highs of €96 in February before Russia invaded Ukraine that sent prices plummeting to €58 in March, explained Luke Oliver, managing director, head of climate investments, and head of strategy at KraneShares, in a recent blog post on the Climate Market Now blog.
EU Allowance prices recovered throughout the summer, reaching new record highs mid-August, buoyed by soaring electricity costs as Russia began systematically cutting off gas supply to the EU in relation to sanctions, before falling for the rest of the year to end at €73.25
UK Allowances performed similarly in 2022, beginning the year at £74.60, rising in August before falling to close the year at £73.25. The weakening of the euro and the pound against the dollar also weighed on European carbon allowances in 2022, alongside an unseasonably warm winter at the end of the year.
“Warmer than normal winter weather has impacted energy demand, and in turn, market sentiment. Warmer weather means less burning fuel to heat homes, which reduces demand for allowances,” Oliver explained.
Major EU Regulation Tightens Allowances Market
The EU finally reached an agreement on the “Fit for 55” plan at the end of December that will lay out the framework for emissions reductions to attempt to align the EU with zero-emissions targets. Among the many resolutions agreed to were a reduction of greenhouse gas emissions from its current 43% goal by 2030 to the new 62% goal by 2030 compared to 2005 levels, and also a cap on oil barrel prices from Russia.
In addition, maritime emissions will be covered under the Emissions Trading System (ETS) beginning in 2024 and fully phased in by 2026, and free allowances currently in the system will be phased out beginning in 2026 and completely eliminated by 2034. The EU is also setting up a secondary ETS for fuel used for road transportation that will be completed by 2027.
All should lend strong underlying support for EU allowance prices looking ahead as the costs to pollute rise and industries work to transition to net-zero plans.
Investing in Europe’s Carbon Markets With KraneShares
The KraneShares European Carbon Allowance ETF (KEUA) offers targeted exposure to the EU carbon allowances market and is actively managed. The fund’s benchmark is 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 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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