Curious About the Benefits of a Carbon Cap-and-Trade Program?

There are many methods of working to fight climate change, from technology-driven approaches such as carbon capture to innovations that inherently reduce or eliminate the production of harmful greenhouse gases, but perhaps one of the most popular and well-known are cap-and-trade programs, which essentially tax entities that go above prescribed emissions limits. While these programs work to provide increasing pressure to reduce emissions over time, they are also contributing proceeds back into programs that work to improve quality of life and educate the next generation on climate care.

For the sake of brevity, let’s take a look at the California cap-and-trade program, which contributes proceeds from the auctions of its carbon allowances into the Greenhouse Gas Reduction Fund, overseen by California Climate Investments. In its 2022 annual report, it breaks down over 129,000 different projects that have been funded. The projects funded in 2021 are estimated to remove 10 million metric tons of carbon dioxide equivalents over the course of their lifetime, according to the press release.

Projects include betterment of vehicle fleets used for public services, such as investing in electric buses, funding rebates for electric car conversions by residents, and other electric vehicle initiatives. Other projects include combating deforestation by planting trees, or in some cases replanting where recent wildfires have burned down local forests and vegetation. Some projects focus on funding volunteer work, while others fund education for children on climate change and how they can contribute to reducing climate impacts.

Other notable uses include funding to increase the energy efficiency of low-income housing through better insulation and roofing improvements and providing water efficiency tools for residents. To date, $5.2 billion has been targeted specifically to priority populations and will be heavily impacted by climate change.

“California continues to lead the way in confronting the sources of emissions that are driving the climate crisis, while bolstering resilience in our most vulnerable communities,” said Governor Gavin Newsom in the press release. “We’re committed to ensuring that the communities most burdened by air pollution share in these benefits, with cleaner transportation options, cleaner air, increased energy efficiency, and more livable communities.”

Investing in California’s Decarbonization With KCCA

Cap-and-trade programs, and the associated carbon allowance markets, work on the premise that the cost of emitting harmful greenhouse gases is only going to increase for companies and industries in a world focused on decarbonization. The KraneShares California Carbon Allowance ETF (KCCA) offers targeted exposure to the joint California and Quebec markets.

KCCA is a fund that offers exposure to the California cap-and-trade carbon allowance program, one of the fastest-growing carbon allowance programs worldwide, and is benchmarked to the IHS Markit Carbon CCA Index. The CCA includes up to 15% of the cap-and-trade credits from Quebec’s market.

The index measures a portfolio of futures contracts on carbon credits issued by the CCA and only includes futures with a maturity in December in the next year or two, while using a wholly owned subsidiary in the Cayman Islands to prevent investors from needing a K-1 for tax purposes.

The fund may also invest in emission allowances issued under another cap-and-trade system, futures contracts that aren’t carbon credit futures, options on futures contracts, swap contracts and other investment companies, and notes that aren’t necessarily exchange-traded.

KCCA carries an expense ratio of 0.79%.

For more news, information, and strategy, visit the Climate Insights Channel.