Carbon Credit Investing Ready for Its Close-Up | ETF Trends

Due to weakness in the EU allowance (EUA) market, carbon allowance investing has scuffled in early 2024. However, some market observers believe that lethargy will abate. And that could potentially pave the way for upside as the year moves forward.

That could be constructive for funds like the KraneShares Global Carbon ETF (KRBN) and the KraneShares California Carbon Allowance ETF (KCCA). KRBN is global in reach, combining California carbon allowances (CCAs), EUAs, and U.K. carbon allowances. KCCA focuses on CCAs in California and Quebec, Canada.

KCCA has been a juggernaut among carbon allowance ETFs. It’s gained nearly 37% over the past year. It’s possible that bullishness could extend to other corners of the carbon allowance market.

EUA Market Poised for Resurgence

In what could be beneficial to KRBN due to its significant exposure to EUAs and the  KraneShares European Carbon Allowance Strategy ETF (KEUA), there’s optimism the EUA space is ready to bounce back at some point this year.

“EUAs are in a narrow window of softness, currently in the middle of a curve flattening as the market absorbs the frontloaded REPowerEU supply introduced last year to fund the bloc’s transition to greater energy independence, while muted industrial recovery weighs on demand,” according to KraneShares research. “However, at these levels, we believe EUAs are positioned for a considerable correction back up to their previous pre-Ukraine invasion prices. [That’s especially so] as the market soon begins fully pricing in the upcoming supply-tightening policy reform measures.”

Regarding KEUA and KRBN have sluggish of late. But there are solid fundamentals underpinning the EUA market. That could be indicative of a disconnect that investors could capitalize on with KEUA or KRBN.

“We see fundamentals and sentiment returning as early as the next six months as the market begins pricing in the forward curve steepening after 2025 when the REPowerEU allowance auctioning ends and more of the Fit for 55 policies are fully implemented,” added KraneShares. “We expect to see that tightness start pricing in back to the €80-100 range, before moving on to €140 by 2030.² Currently, prices are in the high €50s.”

So the EUAs found in KEUA could come close to doubling over the near- to medium-term. That’s potentially significant upside for the ETF along the way.

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