Luke Oliver on CBAM's Impact on Carbon Pricing

The European Union Carbon Border Adjustment Mechanism (CBAM) continues to make headlines as global industries grapple with the new mandates. While creating industry challenges, Luke Oliver of KraneShares discussed the opportunities for investors.

CBAM took effect last October. The program is in a two-year transitional phase and begins in full in 2026, with reporting started at the beginning of this year.

The carbon border tax currently covers those products with the most intense carbon emissions and carbon leakage according to the European Commission. These include aluminum, cement, iron and steel, electricity, hydrogen, and fertilizers.

“Europe is exporting the price of carbon globally,” explained Luke Oliver, managing director, head of climate investments at KraneShares. “If you want to sell in Europe, you have to pay the carbon tax.”

Leveling the Carbon Playing Field

CBAM works to level the carbon playing field for the EU. Under the current system, regions without carbon pricing benefit from cheaper prices than regulated markets. They’re able to export the cost of pollution, creating an uneven playing field for those countries and regions working to drive emissions reductions through regulated carbon markets.

CBAM forces importers from regions without regulated carbon markets to account financially for the carbon emissions embedded in their products. The price they pay relies upon the current price of EU carbon allowances. Imports from regions with a regulated carbon market will either pay discounted prices or bypass paying as the price of carbon is already embedded.

Explainer of how CBAM functions once fully in effect in 2026.

Image source: European Commission

In other words, Europe is working to bring the rest of the industrial world up to speed on carbon emissions reductions. Given the EU’s track record of driving change in global market practices, it’s worth understanding CBAM’s implications.

“Europe banned lead in microchips, and when they did that, they essentially banned lead microchips globally,” Oliver explained. “It was cheaper for microchip producers to remove lead in all chips then to run two different production lines. Economics drive everything.”

The Dual Benefits of CBAM

Oliver foresees two primary outcomes driven by CBAM implementation. The first is that it creates more revenue and price discovery opportunity for the EU carbon market, driven by more companies paying the carbon tax.

Secondly, it likely leads to the creation of more carbon markets. Countries and regions may decide they want to retain the revenues paid for carbon for themselves. Oliver theorized; “It will make those countries say, ‘Why are we giving money to Europe? If someone’s paying for carbon, why don’t they pay it to us?’”

S&P Global estimates that CBAM could generate revenues of $80 billion annually by 2040.

Oliver foresees greater EU Allowance (EUA) demand as more companies look to hedge costs. This, alongside the reductions and phase-out entirely of free allowances in the EU Emissions Trading System by 2030 and phase-in of CBAM, create potential momentum for EUA prices looking ahead.

“We’re going to see this pressure ramping up, and it gets steeper and steeper into 2030,” Oliver noted.

Investing in European Carbon With KraneShares

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.

This 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 those investors seeking diversified exposure across the major carbon markets, the KraneShares Global Carbon Strategy ETF (KRBN) is worth consideration. The fund was the first of its kind to offer an investment take on carbon credits trading. KRBN 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 Regional Greenhouse Gas Initiative markets and the United Kingdom Allowances. KRBN carries a management fee of 0.79%.

For more news, information, and analysis, visit the Climate Insights Channel.