Supporting Sustainability Through a Global Carbon ETF Strategy

As a way to put free-market economics to work in the fight against rising global temperatures, the world has collaborated to reduce emissions through carbon pricing, and investors can also gain exposure to the free market that determines the price of CO2 pollution through a targeted exchange traded fund.

The KraneShares Global Carbon ETF (KRBN) can help investors access the carbon allowances futures market, a comprehensive global price for carbon emissions.

KRBN tries to reflect the performance of the IHS Markit’s Global Carbon Index, which offers broad coverage of cap-and-trade carbon allowances by tracking the most traded carbon credit futures contracts. The index introduces a measure for hedging risk and going long for carbon price while supporting responsible investing. Currently, the index covers the major European and North American cap-and-trade programs: European Union Allowances (EUA), California Carbon Allowances (CCA), and the Regional Greenhouse Gas Initiative (RGGI).

According to IHS Markit data, as of the end of 2020, the global carbon price was $24.05 per ton of CO2. It is estimated that carbon allowance prices need to reach a range of $50 to $100 per ton of CO2 to achieve the emissions reductions goals based on The Paris Agreement.

Working Toward ESG Investment Goals

KraneShares believes that going long the price of carbon could help support responsible investing and incentivize pollution reduction aligned with ESG investment goals. Furthermore, the KraneShares Global Carbon ETF could provide potential portfolio diversification since the global carbon futures markets’ have historically exhibited low correlation to other asset classes.

“KRBN may be appropriate for investors who are concerned about the increase in the cost of carbon emissions on their portfolios. As the cost of carbon emissions rise, KRBN typically benefits, while companies with heavy carbon footprints typically suffer,” according to KraneShares.

Economists believe that if there is pricing on carbon emissions, the free market could optimally adjust prices to provide the best solution of goods and services while accounting for environmental damages caused by carbon emissions.

Looking ahead, KraneShares highlighted China’s emissions trading market. Once China’s emissions trading market is fully implemented, it is expected to be the largest carbon allowance market globally, potentially providing an additional catalyst for the performance of the global carbon allowance market.

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