The Regional Greenhouse Gas Initiative (RGGI) carbon market continues its upward momentum this year at a time when equity volatility persists. The KraneShares Global Carbon ETF (KRBN) is the only fund to offer exposure to the market.
RGGI is a carbon market in the Northeastern U.S. and spans 11 states. Carbon allowances within RGGI are currently up 35% year-to-date and 56% in the last year.
Regulated carbon markets generate increasing pressure for industry participants to reduce emissions. Market participants are allotted a specified amount of carbon dioxide emissions each year. Any amount over and they must buy a carbon allowance to cover the difference, equivalent to one metric ton.
RGGI’s carbon market currently covers the power sector. Any electric power plants that generate over 15 megawatts of electricity each year must retain allowances that equate to their emissions, according to RGGI.
RGGI Breaks Through Ceiling, KRBN Captures
One of the mechanisms to help manage price volatility and speculative trading entails injecting more supply when prices rise beyond a predetermined threshold. Supply comes from the Cost Containment Reserve (CCR) and equates to 10% of the annual regional cap. CCR is triggered when the price threshold crosses $15.92 this year, and the threshold increases 7% annually. Prices currently hover around $22.00 as of 05/16/2024.
“Once the soft ceiling price is consistently breached, then the market begins to assume the liquidity injection will occur consistently,” explained Luke Oliver, managing director, and head of climate investments at KraneShares. “At that point, the additional liquidity becomes part of the base supply and no longer meaningfully dampens prices. This suggests a meaningful move higher, rather than a short term spike… we’re watching closely”
Currently, KRBN is the only ETF to offer exposure to the market. The fund was the first of its kind to offer an investment take on carbon allowance trading. KRBN tracks the S&P Global Carbon Credit Index, which follows the world’s most liquid carbon allowance futures contracts.
This includes contracts from the European Union Allowances (EUA) and California Carbon Allowances (CCA). It also includes the Regional Greenhouse Gas Initiative (RGGI) markets and the United Kingdom Allowances (UKA).
Image source: KraneShares
RGGI currently accounts for 6.71% of KRBN’s NAV as of 05/21/2024. While it seems like a small amount, a 5% allocation is a significant investment within a portfolio. A 5% weight to one asset or strategy can often contribute to a noteworthy performance. It makes investing in KRBN worth consideration this year, given RGGI’s performance over the last year.
KRBN carries a management fee of 0.79%.
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