Climate-related investing has garnered more attention in recent years. So a growing number of advisors and investors have gained familiarity with the carbon credits market.
Thanks to ETFs such as the KraneShares Global Carbon Strategy ETF (KRBN), carbon credit investing is more accessible than ever. Still, many market participants that are considering such ETFs aren’t familiar with the pricing dynamics of the carbon credits market.
As is the case with traditional asset class, including stocks and bonds, price action is meaningful with KRBN and stablemates the KraneShares California Carbon Allowance ETF (KCCA) and the KraneShares European Carbon Allowance Strategy ETF (KEUA). Fortunately, carbon pricing is a more approachable topic than many investors believe it to be. As is seen with traditional commodities, it’s very much a function of supply and demand.
Inside Carbon Pricing
Put simply, carbon credit prices are set via auctions and in secondary markets.
“There is also an element of built-in declining of supply of these allowances, creating an environment supportive of price appreciation. This dynamic incentivizes behavior change by businesses to encourage investments in cleaner technologies. Companies that can successfully reduce their emissions are rewarded with increased profitability from reduced costs of their ETS compliance obligations,” noted Oktay Kurbanov, a partner at Climate Finance Partners (CLIFI).
For investors considering products such as KRBN, KCCA, and KEUA, it’s worth noting that carbon credit markets are surprisingly efficient. Those efficiencies allow for direction of capital to the most marquee projects. That improves the process of reducing emissions.
“In 2022, the four major ETS programs generated $55 billion to support government climate objectives and social programs related to energy transition. This is another illustration that well-functioning ETS are a key to successful government policies and driving forces behind climate action,” added Kurbanov.
Funds Offer Level of Simplicity
Advisors and investors want to know how these three ETFs achieve their objectives. They offer a level of simplicity. That’s because each is an index-based products. Their benchmarks provide exposure to baskets of carbon credits futures contracts.
Additionally, the KraneShares ETFs have proven to be enhancers of carbon credit market liquidity, serving an important function in expanding the marketplace.
“KraneShares carbon allowance ETFs gain their exposure to compliance carbon allowances through futures, tapping into the most liquid markets to provide investors with exposure to the price of carbon while supporting liquidity and stability of the ETS,” concluded Kurbanov. “Launched in 2020, KRBN became the first ETF to focus on carbon allowance markets. As financial participants started trading carbon assets, these markets’ liquidity increased three-fold from 2019 to 2022, contributing to their efficient operation.”
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