European Union carbon allowance prices remain muted this year, but summer months could result in increased volatility. Investors looking to capture long-term opportunity in Europe’s carbon market at current prices would do well to consider the KraneShares European Carbon Allowance Strategy ETF (KEUA).
This year remains challenging for European Union energy investors. A milder-than-expected winter left reserve gas supplies at high levels. Current storage levels hover around 76% as of the end of June, KraneShares reported on their Climate Market Now blog. Reserve levels are expected to reach the 90% mandate ahead of the deadline on November 1st.
It’s also a challenging year for EU carbon investors. Declining coal use as the shift continues to more emissions-efficient natural gas creates lower demand for carbon allowances. KraneShares reports a 20% decline in coal-driven power year over year.
“The narrow differential between the generating speeds for gas and coal has effectively floored the price of gas and, in turn, carbon,” KraneShares wrote.
As always, gas prices remain susceptible to changes in supply, such as North Sea outages that sent prices soaring temporarily earlier this year. That, alongside unpredictable weather events, could lead to heightened volatility for gas prices and, subsequently, carbon. EU carbon allowance price movements remain relatively correlated to natural gas prices this year.
Carbon prices could also experience elevated volatility in the hottest summer months of July and August. These months will likely see the highest demand level from EU carbon market participants.
Harness Short-Term Opportunity for Long-Term Gains With KEUA
The long-term prognosis for EUA prices remains unchanged, with tightening supply and increased demand creating potential long-term positive pricing pressure.
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.
KEUA currently trades above its 200-day Simple Moving Average (SMA) but remains just shy of its 50-day SMA as of 07/03/24. From a technical perspective, it’s a fund to watch as summer demand kicks into high gear.
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%.
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