The Inflation Reduction Act did a lot to move the needle in the right direction toward emissions reductions in the U.S. The progress still falls short of the Paris Agreement levels required to curb warming, however, leaving U.S. carbon markets in a strong position in the coming decades.
The latest findings from the U.S. Energy Information Administration this year forecast emissions from the energy sector missing the mark of Paris Agreement levels. Under the Paris Agreement, the U.S. agreed to 50-52% broad greenhouse gas emissions reductions compared to 2005 levels.
Even taking into account the role that the Inflation Reduction Act plays in hastening the climate transition domestically, the energy sector is on course to trend higher.
“By 2030, energy-related CO2 emissions fall 25% to 38% below 2005 levels, depending on case assumptions,” the EIA wrote in their 2023 report.
Image source: U.S. Energy Information Administration
It’s well short of the 50-52% needed and doesn’t account for broader emissions, only those tied to energy. Much depends on the direction of the economy as well as the cost of zero-carbon generation technology. A robust, growing economy releases significantly more emissions than a slower growth one. Additionally, the cost-prohibitive nature of carbon technology reduces the adoption rate.
Carbon Markets Play Pivotal Role in U.S. Emissions Reductions
So what does that have to do with carbon markets? Quite a bit, as it turns out. Carbon markets in California and the North East (Regional Greenhouse Gas Initiative) are structured in a way that it becomes increasingly cost-prohibitive to emit greenhouse gases. As more supportive policy rolls out in the U.S., the regulated markets stand to benefit.
In an environment where greater reductions are needed, the costs of carbon allowances are likely to rise in the coming years. In California, the market already has a mechanism in place to raise the carbon allowance floor price every year. It creates an opportunity for investors to capitalize on the transition to net-zero emissions in the U.S.
KraneShares offers two ways to gain exposure to the U.S. carbon market.
The KraneShares California Carbon Allowance ETF (KCCA) offers targeted exposure to the joint California and Quebec carbon allowance market. This includes California’s cap-and-trade carbon allowance program. It’s one of the fastest-growing carbon allowance programs worldwide. KCCA is benchmarked to the IHS Markit Carbon CCA Index. The CCA includes up to 15% of the cap-and-trade credits from Quebec’s market. Year-to-date, KCCA is up 22.06%.
The KraneShares Global Carbon ETF (NYSE: KRBN) was the first of its kind to offer an investment take on carbon credits trading. The fund provides diversified exposure to major carbon markets worldwide. KRBN tracks the IHS Markit Global Carbon Index, which follows the most liquid carbon credit futures contracts in the world.
This includes contracts from the European Union Allowances (EUA) and California Carbon Allowances (CCA). It also includes the Regional Greenhouse Gas Initiative (RGGI) markets, and the United Kingdom Allowances (UKA). Year-to-date the fund is up 3.92%.
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