Case for Carbon Investing Evolving, Gaining Momentum

Carbon allowances/credits have emerged from being an opaque, often inaccessible class to one that’s highly democratized and increasingly mainstream.

That’s good news for pioneering exchange traded funds such as the KraneShares Global Carbon Strategy ETF (KRBN). One of the largest ETFs in the space, KRBN follows the IHS Markit Global Carbon Index, which provides exposure to European Union Allowances (EUA), California Carbon Allowances (CCA), the Regional Greenhouse Gas Initiative (RGGI), and United Kingdom Allowances (UKA).

KRBN is one of the premier ETF avenues for investors looking to tap into the global allowance price action. By some estimates, these global allowance prices could nearly triple in the years ahead. That’s because more corporations and governments are planning aggressive carbon-reduction agendas.

Speaking of Government Carbon Plans…

When it comes to traditional asset classes, government interference is usually the last thing investors want. But the opposite is often true in the carbon space because it’s governments that have the financial resources to affect meaningful change. That could be a relevant point for market participants evaluating KRBN.

“Governments in the EU, California, the US East Coast, and the United Kingdom have made participation in these programs mandatory, and they control the supply. If a company pollutes 10 tons, they must buy 10 credits. For governments to incentivize companies to shift toward greener operations, the price of emissions must increase over time. Through the KRBN ETF, investors get access to carbon credit prices through futures,” according to KraneShares research.

When it comes to returns, past performance isn’t guaranteed to repeat. That holds true across all asset classes, but KRBN’s track record is impressive. The ETF isn’t yet four years old and it’s returned nearly 140% since inception. Asking for returns like that over the next several years is demanding, but upside is possible when acknowledging the growth outlook for the carbon credit market.

Potentially Positive Implications

Plus, there are other attractive reasons for more market participants to enter this market. That includes potentially positive implications for the broader clean energy ecosystem.

“Compliance carbon can offer a pure exposure to climate action and align with impact investment goals,” concluded KraneShares. “The markets have one purpose: to reduce carbon emissions within the economies in which they operate. By participating in these markets, investors help support price discovery and add liquidity, making the markets more efficient and effective. As carbon prices rise, polluters are incentivized to decarbonize their business operations or incur higher costs to source allowances. These higher prices also drive fuel switching and more capital toward green innovations.”

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