Many investors may unintentionally be shorting carbon.
Investors likely own many companies that are required to buy carbon credits or choose to make commitments to buy carbon offsets. Thus, portfolios not actively investing in carbon markets are effectively shorting carbon, according to KraneShares’ Luke Oliver.
“The companies you own have to buy carbon credits, and they probably make commitments to buy carbon offsets. So you’re short the price of carbon,” he said. “You should be at least 4%-5% long something like KRBN just to neutralize that that risk.”
The KraneShares Global Carbon Strategy ETF (KRBN) provides broad exposure to carbon allowances, 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).
See more: “Governments Play Vital Role in Carbon Investing”
The Investors Guide to Compliance Carbon
Compliance carbon is based on cap-and-trade programs, also known as Emissions Trading Systems (ETS), which regulate emissions for mandated industries in their respective jurisdictions, forming a new type of investable asset class called carbon allowances or carbon credits.
Compliance carbon allowances are an emerging asset class that has recently garnered significant attention with its strong performance. Carbon allowances are expected to continue to rise in value as demand remains consistent, but supply is reduced over time.
By investing in a fund like KRBN, investors are effectively long the energy transition and long the price of carbon, according to Oliver. It’s a strategy for adding a green/carbon overlay to a portfolio that doesn’t require an investor to make sector and stock bets. Traditional ESG lenses screen out companies, adding other risks to portfolios.
KraneShares has several funds in its suite of climate ETFs providing exposure to compliance carbon. In addition to KRBN, the issuer offers the KraneShares European Carbon Allowance Strategy ETF (KEUA) and the KraneShares California Carbon Allowance ETF (KCCA).
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