UK Carbon Market Sets Tighter Targets, KRBN Captures

The UK government announced a string of proposals for its carbon allowances market, tightening aggressively while smoothing the way for industry transition. Tighter targets and inclusion of more sectors are bullish for the UK carbon allowances market and the KraneShares Global Carbon ETF (NYSE: KRBN) with exposure to the UK regulated market.

The reforms published this month by the UK government followed months of public responses and reduces the emissions cap by 30% between 2021-2030.

“Ambitious climate policy is a fundamental part of driving sustainable economic growth,” the authors of the UK Emissions Trading System (UK ETS) response explained.

Building the Bridge to Sustainable Reductions

With an eye towards sustainable transition, the UK plans to release 53.5 million more allowances from reserves between 2024-2027. These unallocated allowances already exist in current reserves and are added to directly address rising energy costs in the UK. That said, UK allowances offered at auctions will reduce from 68.2 million next year to 23.8 million in 2030, including the additional allowances between 2024-2027.

Image source: UK Government

The new regulations also increase the amount of free allowances granted to industry as the cap difference between this year and next decreases significantly. Free allowances will increase to 40% from their current 37%, providing more for companies adjusting to greater reductions.

Furthermore, the UK follows in the footsteps of the EU in adding maritime emissions domestically by 2026. The plan also includes the additional coverage of waste and waste incineration by 2028 and adding CO2 upstream emissions from oil and gas.

The UK government plans to review the inclusion of greenhouse gas removal technologies as an option for market participants to reduce overall emissions. Government agencies will also partake in further consultation to be completed by end of year on the new expansions.

“We intend that this will support the ongoing transformation of our energy systems,” the authors wrote. UK ETS changes “will send a clear signal to businesses, providing them with the confidence to invest in longterm decarbonisation now to secure a sustainable future.”

Investing in the Bullish Outlook for the UK Carbon Market

The KraneShares Global Carbon ETF (NYSE: KRBN) was the first of its kind to offer an investment take on carbon credits trading. KRBN provides exposure to major carbon markets worldwide, including the UK market.

The fund provides inherent diversification through the number of global carbon allowances markets it invests in, in addition to the non-correlated nature of carbon allowances.

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) and the United Kingdom Allowances (UKA) overseas. It also includes the California Carbon Allowances (CCA) and Regional Greenhouse Gas Initiative (RGGI) markets domestically.

KRBN carries an expense ratio of 0.78%.

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