So far, 2024 has not been an ideal year for European carbon prices, but hope may be on the horizon. Last week, European prices posted the first week-on-week gain of the year, trading upwards of €58/tonne in some instances.
In the short term, carbon prices have been off to a difficult start this year. According to a recent KraneShares analysis, “Prices have tumbled by as much as 30% since the start of the year as natural gas has displaced coal in the power sector and rising renewable energy output continues to marginalize all fossil generation. The addition of more than 250 million EUAs to supply between 2023 and 2026 is also dampening price expectations in the short term.”
“However, traders seem to be looking beyond the short term and are beginning to eye an upturn in demand in the second half of the year. As economists predict interest rates may begin to fall and the macroeconomic outlook is expected to improve,” KraneShares added.
Capitalizing on Potential Upswing With KEUA
The KraneShares European Carbon Allowance Strategy ETF (NYSE Arca: KEUA) can be a beneficial choice for investors interested in capitalizing on the potential upswing in European carbon prices. KEUA gives investors exposure to the European Union Allowances (EUA) carbon allowance program. The fund is benchmarked to the IHS Markit Carbon Index, which in turn tracks EUA futures contracts.
The EUA cap-and-trade program the oldest and most liquid carbon allowance market. It oversees roughly 40% of the European Union’s total emissions. Participants in the program include at least 27 EU Member States, along with Norway, Iceland, and Liechtenstein. The “Fit for 55” package remains integral for the program. The market’s allowances cap is tightening at a faster pace, between 2.2% to 4.4% annually.
KEUA is actively managed and contains a 0.79% expense ratio. The fund currently has roughly $13.5 million in assets under management. Additionally, the fund works with a subsidiary operating under Cayman Islands law for investing in carbon credit futures.
Looking ahead for European carbon allowances, fluctuating natural gas prices serve as an indicator of demand. “As gas prices fall, coal becomes less profitable on average and forces even the most efficient coal-based generation offline, diminishing the demand for EUAs,” KraneShares noted.
Alternate Options
Investors who are not yet ready to hedge all their bets on EUAs may find appeal in the KraneShares Global Carbon Strategy ETF (NYSE Arca: KRBN). KRBN provides exposure to EUAs. It also covers California Carbon Allowances (CCA), the Regional Greenhouse Gas Initiative (RGGI), and United Kingdom Allowances (UKA). KRBN’s global reach allows investors to tap into EUAs while still providing access to other highly traded carbon futures contracts.
Even in moments of uncertainty for carbon allowance futures, both KEUA and KRBN feature low correlation to traditional asset classes. This makes both funds a valuable option for diversifying investor portfolios.
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