As investments in carbon markets become increasingly popular, investors must understand the difference between carbon offsets and carbon credits.
Understanding Carbon Credits
A carbon credit is also known as a carbon allowance. It is a government-issued permit, representing the legal right to emit one metric ton of carbon dioxide or equivalent greenhouse gas. Furthermore, carbon credits are the cap-and-trade programs enacted by individual economies.
Carbon credits are issued to companies and organizations participating in a mandatory national or international carbon market. They are generally either purchased by regulated emitters or allocated for free based on forecast carbon emissions, per KraneShares.
Carbon credits or allowances should rise in value as demand remains consistent but supply is reduced over time.
The KraneShares Global Carbon Strategy ETF (KRBN), the KraneShares European Carbon Allowance Strategy ETF (KEUA), and the KraneShares California Carbon Allowance ETF (KCCA) each provide exposure to carbon allowances.
See more: “This California Carbon ETF Is Up 30% in 2023”
KRBN provides the broadest exposure to carbon credits, tracking all major global cap-and-trade programs. These programs include the European Union Allowances (EUA), California Carbon Allowances (CCA), and the Regional Greenhouse Gas Initiative (RGGI).
Meanwhile, KEUA offers targeted exposure to the European Union Allowances (EUA) program. The EUA program is the world’s oldest and most liquid carbon allowance market. EUAs have offered compelling returns in recent years as prices more than tripled between 2019 and 2022.
Conversely, KCCA offers targeted exposure to the California Carbon Allowances (CCA) cap-and-trade carbon allowance program. The CCA program is one of the fastest-growing carbon allowance programs globally.
How Carbon Offsets Differ
Carbon offsets generally operate outside of an emission trading scheme (ETS) or can be imported into an ETS. Like carbon allowances, carbon offsets represent one ton of carbon dioxide or equivalent greenhouse gas.
Carbon offsets are generated by a reduction in emissions made by a voluntary project designed specifically for that purpose, according to KraneShares. Carbon offset projects include building wind turbines or solar farms, supporting methane reduction projects, planting a tree, or preserving forests.
The KraneShares Global Carbon Offset Strategy ETF (KSET) provides broad coverage of the voluntary carbon market by tracking carbon offset futures contracts. The fund tracks carbon offset futures contracts comprising Nature-Based Global Emission Offsets (N-GEOs) and Global Emission Offsets (GEOs).
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