Climate-aware investors know that California has long been a leader when it comes to advancing carbon-reducing and green energy agendas. For example, the largest state in the U.S. is aiming to mandate that electric vehicles are the only new cars sold in the state starting in the 2030s.
On a related note, California is looking to implement a requirement that half of all new semi trucks sold there be electric by 2035. Those are just two points, but they underscore the relevance of the KraneShares California Carbon Allowance ETF (KCCA).
That exchange traded fund follows the IHS Markit Carbon CCA Index, providing investors with access to the California Carbon Allowances (CCA) cap-and-trade market. It’s a nuanced market to be sure, but it’s one with merit, indicating that KCCA could be a relevant consideration for investors seeking alternative additions to portfolios heavy on standard asset classes.
“A recent update to its Climate Change Scoping Plan, the state’s overarching plan to meet its emissions targets, called for increasing the stringency of its 2030 emissions target that determines cap-and-trade supply. Since then, key policymakers have indicated that the cap-and-trade program will be recalibrated to be more aggressive as soon as 2025. Additionally, they are considering other revisions to address the market’s historic surplus and future carbon offset use,” according to KraneShares research.
Several longer-ranging California carbon policy initiatives highlight potential allure with KCCA. Those include reduced carbon market caps by 2025, extending cap-and-trade past 2030, shoring up carbon offset requirements, and the introduction of supply-controlling mechanisms in a bid to better address too much supply.
As KraneShares noted, the California Air Resources Board (CARB) sets the state’s Climate Change Scoping Plan every five years. Of note to investors considering KCCA, recent CARB assumptions indicate that the state’s 2030 GHG emissions need to be 48% below 1990 levels to meet carbon-reduction goals.
CARB can propel that initiative by trimming market caps and removing excess supply from the market. Those are ambitious endeavors to be sure, but if they prove fruitful, KCCA could benefit. For investors taking a long-term view of KCCA, California’s likely extension of cap-and-trade in 2030 could be another positive for the ETF.
“The emissions in 2030 are still expected to be at least 200Mt even if the optimistic Scoping Plan scenario materializes, while the Reference scenario projects them to be around 300Mt,” concluded KraneShares. “At these levels, there is plenty of room for the cap-and-trade system to contribute in the 2031-2045 period to help move California toward carbon neutrality. Greater clarity on the program’s extension should, in turn, provide a boost to CCA prices as the dampening effect from the program uncertainty will be removed.”
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The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.