California has some of the most stringent emissions regulations in place in the U.S. and continues to pass laws focused on driving the energy transition from fossil fuels to renewable energies and low-emissions practices. There is a great opportunity for investors wishing to capture the increasing costs of emissions for companies through California’s shared carbon market with Quebec.
The biggest gas utility company in the U.S., Southern California Gas Co., a subsidiary of Sempra Energy, is working to reinvent itself in the face of California’s increasing legislation focused on phasing out natural gas used residentially. The state has banned gas furnace and water heater sales beginning in 2030, and many cities already prohibit gas connections in new construction buildings.
The company is the only major utility provider in California that is focused solely on gas and finds itself caught in the emissions transition crosshairs. SoCalGas hopes to overhaul much of its operation to provide green hydrogen instead in the coming years but it will take billions of dollars of investment and building out all new pipelines and either retire or repurpose existing ones.
California has a more aggressive zero-emissions timeline of 2045 compared to the country and much of the world, and the more aggressive policies and legislation are leading to rapid transition and innovation.
“It’s the California way — set the goal, then figure out how to get there,” Mike Florio, a Gridworks senior fellow, and former CPUC commissioner, told the WSJ. “Policy is forcing the technology.”
Investing in the California Carbon Markets with KCCA
The KraneShares California Carbon Allowance ETF (KCCA) offers targeted exposure to the joint California and Quebec carbon allowance markets and will benefit from the aggressive push to reduce emissions as rapidly as possible. Advisors and investors have taken notice of the opportunities in California’s joint carbon market this year, with KCCA bringing in net flows of $171 million year-to-date.
KCCA is a fund that offers exposure to the California 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 index measures a portfolio of futures contracts on carbon credits issued by the CCA and only includes futures with a maturity in December in the next year or two while using a wholly-owned subsidiary in the Cayman Islands to prevent investors from needing a K-1 for tax purposes.
The fund may also invest in emission allowances issued under another cap-and-trade system, futures contracts that aren’t carbon credit futures, options on futures contracts, swap contracts and other investment companies, and notes that aren’t necessarily exchange traded.
KCCA carries an expense ratio of 0.78%.
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