The International Civil Aviation Organization (ICAO), an agency for the UN, announced that it will be working toward an “aspirational goal” of net-zero emissions for the aviation industry by 2050, explained Luke Oliver, managing director, head of climate investments and head of strategy at KraneShares in a recent post on the Climate Market Now blog.
The goals set out by ICAO will be heavily reliant on both developing and emerging technologies — such as the developments happening in sustainable fuels — as well as better business practices that will work to reduce operational emissions. The emissions that cannot be captured or mitigated will likely be offset in what could be a big boost for the voluntary carbon offset markets and carbon offset investing.
It’s a pathway that aligns with the Paris Agreement in which companies seek to both reduce and remove emissions as much as possible and then offset the rest. It’s also an issue that ICAO has been trying to tackle since 2016 when it formed the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA). CORSIA created baseline emission goals beginning in 2019 and required airlines in 118 countries participating in the agreement to offset anything above the permitted level.
Estimates from 2020 by the German government put carbon offset demand at 2.7 billion tons between 2021-2035 from the CORSIA market alone. For reference, the total amount of offsets in 2021 was just 500 million tons.
“Since CORSIA only addresses emissions growth over and above the baseline of 2019, a ‘net zero’ approach would probably need to broaden the market’s scope to address all emissions from aviation, which could lead to explosive growth in aviation’s demand for carbon offsets,” Oliver wrote.
For now, ICAO isn’t anticipated to give any firm guidance on how it will achieve net zero by the 2050 goalpost, and CORSIA currently only allows offsets from pre-approved projects that adhere to certain standards and organizations, but an increase in demand could cause these requirements to be relaxed according to Oliver.
“With the corporate world increasingly turning to carbon offsets to achieve neutrality, it seems reasonable to expect that the global aviation industry will also do so, which could be a potential catalyst for offsets,” Oliver wrote.
KSET Invests in the Carbon Offset Markets
The KraneShares Global Carbon Offset Strategy ETF (KSET) is the first U.S.-listed ETF that offers investors carbon offset investing opportunities and exposure to the voluntary carbon markets. It tracks the S&P GSCI Voluntary Carbon Liquidity Weighted Index. The index also offers a first-of-its-kind benchmark for the global voluntary carbon futures market performance that trades through the CME group.
The fund is structured to offer global coverage of voluntary carbon markets by tracking carbon offset futures contracts comprised of nature-based global emissions offsets (N-GEOs) as well as global emissions offsets (GEOs) that trade via the CME group.
As the voluntary carbon markets are a dynamic space, the index is structured in a way that will allow flexibility in re-weighting the securities it tracks. It will also move securities in and out of the index regularly, and it only tracks carbon offset credit futures that have a maturity within the next two years. The index weights the offset futures it tracks by the total value of their traded volume over the last six months.
KSET carries an expense ratio of 0.79%.
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