The incoming administration will bring with it a regime shift across many arenas. Included in expected policy shifts are climate initiatives, likely to take a backseat under a second Trump presidency. However, domestic, regulated carbon markets maintain a strong thesis looking ahead, for a number of reasons.
First and foremost, domestic carbon allowance markets enjoy a level of insulation from federal policies. The joint California and Quebec market, the Regional Greenhouse Gas Initiative in the Northeast, the Washington carbon market, and others are all individual state entities. This means regulations come from state governments and remain relatively independent of federal interference.
“This local autonomy allows them to continue pursuing ambitious climate goals, regardless of changes in Washington, D.C.,” KraneShares wrote in a post-election analysis.
What’s more, the number of regulated carbon markets continues to grow in the U.S. Oregon, Vermont, Maryland, and New Jersey all have carbon allowance market proposals in the works. Meanwhile, New York is in the process of building out its own market.
Secondly, existing U.S. carbon markets are no stranger to overcoming legal hurdles and challenges. Both RGGI and California’s market have overcome a variety of legal trials and tests to their regulatory rights and power. “This resilience suggests that even under a more conservative federal administration, these markets are prepared to defend their existence and continue driving emissions reductions,” explained KraneShares.
In fact, federal opposition under a second Trump administration could result in strengthening in states with dedicated climate goals. KraneShares noted that, historically, states with well-established climate initiatives “double down” when federal policy proves unsupportive. Such strengthening could entail more aggressive emissions reductions trajectories, greater market coverage of more industries, or higher carbon allowance prices.
The incoming Trump administration makes clear its open support for fossil fuel growth. Should fossil fuel use expand once more, greater emissions would in turn create greater demand for carbon allowances in existing markets.
“Although we view the likelihood of a substantial impact on cap-and-trade programs as low, the risk appears tilted to the upside,” wrote KraneShares. It only serves to underscore “the increased importance of carbon pricing as a key policy tool to achieve climate goals.”
KraneShares offers a suite of ETFs focused on harnessing the investment potential in a decarbonizing world. The firm has three funds with exposure to some of the largest regulated carbon markets. These include the targeted KraneShares European Carbon Allowance Strategy ETF (KEUA) and the KraneShares California Carbon Allowance Strategy ETF (KCCA).
The firm also offers the KraneShares Global Carbon Strategy ETF (KRBN) that invests in global and domestic markets. These include the California market, RGGI, and, most recently, the Washington state carbon market.
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