Another State Could Be Catalyst for California Carbon ETF

As its name implies, the KraneShares California Carbon Allowance ETF (KCCA) is an exchange traded fund providing investors with access to the California Carbon Allowances (CCA) cap-and-trade carbon allowance market.

One of the members of the KraneShares suite of carbon allowance ETFs, KCCA turns two years old in October. Proving that there’s a receptive audience for this strategy, the fund is home to $261.55 million in assets under management. It’s also the pioneer among state-specific carbon allowance ETFs.

That last trait is practical when considering that California has long been a leader when it comes to carbon reduction policy. California’s CCA cap-and-trade program launched in 2012, making it “old” at the state level. Obviously, California’s CCA policy is KCCA’s driving force, but another state could add to the ETF’s long-term allure: Washington State.

Why Washington State, KCCA Could Be Interesting Pairing

Earlier this year, Washington State rolled out its own CCA program, and an ambitious one at that.

It aims to enhance “the state’s efforts to cut greenhouse gas emissions 45% below 1990 levels by 2030; 70% by 2040; and 95% plus net-zero carbon emissions by 2050. The state now hosts quarterly auctions for emissions allowances and intends to use that revenue to support environmental justice initiatives, as well as investments in climate resiliency, clean transportation and health,” according to the Stockholm Environment Institute (SEI).

In theory, though California and Washington are politically similar states, one’s CCA program shouldn’t affect the other’s, implying that KCCA shouldn’t derive any benefit from Washington’s CCA plans. Upon further examination, the state of Washington could ultimately prove relevant to KCCA investors.

SEI advocates for a linkage between the California and Washington CCA programs, and the institute’s pitch is credible.

“Furthermore, California’s program is currently set to run through 2030, while Washington’s timeline extends through 2050, and Quebec’s has no end date,” added SEI.

Additionally, there is precedent for California’s CCA adding other regions. In 2014, the Canadian province of Quebec, one of that country’s regions furthest removed from the Golden State, joined the California CCA. As a result, KCCA investors have some exposure to Quebec carbon credits. If the IHS Markit Carbon CCA Index, KCCA’s underlying index, adds Washington State to its mix, KCCA would have related exposure.

Bottom line: It’s not a stretch for Washington to link its carbon market to California’s. In fact, Washington’s Department of Ecology is aiming to accomplish just that by 2025.

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