Elections in Europe this summer likely create ongoing foundational support for the carbon market in the EU and U.K. Investors looking to capture long-term opportunity in European carbon markets should look to the KraneShares carbon allowance ETFs.
EU Carbon Market: Few Challenges to Status Quo
Elections in the European Union resulted in a slide to the right for the European Parliament. Both conservative and nationalist parties made significant inroads in numerous countries including France and Germany. Despite this shifting, Parliament remains largely in the hands of the center-right.
The European Commission won’t approve appointments for several months, but it’s expected that current leader Ursula von der Leyen will secure another term, according to the KraneShares Climate Market Now blog.
For carbon markets, it likely means little major change. The majority of market reforms are already underway, with new trajectories largely enshrined. Fit for 55, the Green Deal, and the Carbon Border Adjustment Mechanism (CBAM) are already in place.
The new Parliament will have some sway over the implementation and pace at which some extensions occur. This includes CBAM’s coverage of more sectors and proposals for net greenhouse gas emissions reductions of 90% by 2040. Current trajectories place those reductions around 88% by EU estimates.
Where to Watch Looking Ahead
The incoming Parliament will also debate carbon removals as well, given the market cap’s forecast to reach zero in 2039. This requires emissions to then be offset by carbon removals as opposed to permits.
Likely to be a highly contested topic is the implementation of the secondary emissions market. ETS2 covers emissions from buildings, road transport, and other sectors, with a focus on small industries not previously covered.
“Because capping emissions from downstream fuel use targets consumers more directly than under the main ETS, the cost impacts are expected to be a source of heated debate,” KraneShares explained. The outgoing Commission already created the “Social Carbon Fund” to help offset consumer costs in anticipation of this pain point.
Some of the auxiliary aspects regarding the EU carbon market may change under a new commission. However, the core functions and trajectories are already locked in, creating a continued foundation for EUAs looking ahead.
UK Carbon Market: Opportunities Abound
In the United Kingdom, the Labour party swept the conservatives, in power for over 14 years. It’s a shift that could prove highly beneficial for climate initiatives and the country’s carbon markets.
In campaigns, the Labour party indicated commitment to a number of climate initiatives. These include tripling solar capacity, investing in carbon capture and energy storage, creating its own CBAM, and more.
“Despite the lack of any specific reference to emissions trading, numerous observers and writers have suggested that the most high-profile measure that an incoming Labour administration may take is to begin discussions to link the UK and EU ETS,” KraneShares wrote in the Climate Market Now blog.
This could prove enormously beneficial to the UK Emissions Trading System (ETS), currently operating with approximately a year of carbon allowance surpluses in supply. The still nascent market has no mechanism in place to ensure market stability currently and a rash of free allowance allocations. Joining the two markets could bring prices into alignment and prompt a beneficial overhaul of the UK ETS.
See also: “’Father of Carbon Trading’ Puts Markets in Perspective”
Invest in the EU and UK Carbon Market With KraneShares
The KraneShares Global Carbon Strategy ETF (KRBN) was the first of its kind to offer an investment take on carbon credits trading. The fund tracks the S&P Global Carbon Credit Index, which follows the world’s most liquid carbon credit futures contracts.
This includes contracts from the European Union Allowances and California Carbon Allowances. It also includes the RGGI markets and the United Kingdom Allowances. KRBN carries a management fee of 0.79%.
The KraneShares European Carbon Allowance Strategy ETF (KEUA) offers targeted exposure to the EU carbon allowances market and is actively managed. The fund’s benchmark is the S&P Carbon Credit EUA Index.
The fund’s benchmark tracks the most-traded EUA futures contracts, the oldest and most liquid carbon allowances market. Currently, the market covers roughly 40% of all EU emissions, including 27 member states and Norway, Iceland, and Liechtenstein. The fund carries a management fee of 0.79%.
For more news, information, and analysis, visit the Climate Insights Channel.