Carbon Fund Advisors Inc. announced the launch of the Carbon Strategy ETF (NYSE Arca: KARB), an actively managed thematic ETF that will provide investors with exposure to the global compliance carbon markets, which have grown from 186 billion euros ($220 billion) in 2018 to 760 billion euros ($899 billion) in 2021 according to Refinitiv.
“There is a growing global push to regulate and reduce greenhouse gas emissions in an effort to combat climate change, and emissions trading systems can be an effective tool for governments across the globe to achieve their climate goals,” said Tim Collins, a founder and president of Carbon Fund Advisors, in a news release.
The compliance carbon markets comprise emissions trading systems (ETS) established by regional, national, or subnational jurisdictions to put an explicit price on greenhouse gas (GHG) emissions. A cap is set on the total annual GHG emissions generated by companies in regulated industries. The cap, or permitted emissions, declines annually to achieve the climate goals of the jurisdiction(s).
Carbon allowances equal to the emissions cap may be freely allocated and/or auctioned to emitting companies by the governing entity. Companies within an ETS may buy or sell carbon allowances based on need (i.e., a company with lower emissions may choose to sell allocated carbon allowances to an entity with higher emissions). Emitters with an insufficient number of allowances to offset their emissions at the end of the reporting period incur penalties.
“Most investors do not have access to directly buy and sell carbon allowances in these systems, which is limited to those registered in an ETS,” Collins added. “While active futures markets can provide investors with exposure to certain compliance carbon markets, investing directly in carbon allowance futures contracts can be challenging because of the difficulties associated with gaining access to derivative markets. KARB is a potential solution for that issue because it opens the door to invest in a portfolio of carbon allowance futures at a time when global carbon prices are forecast to rise as the world aims to achieve the goals of the Paris Agreement.”
The fund uses the Carbon Streaming BITA Compliance Index as a reference index, which tracks the performance of the compliance carbon markets through an allocation into a series of carbon allowance futures contracts. KARB will initially hold futures contracts for carbon allowances in some of the most heavily traded carbon markets located in Europe and North America, including European Union Allowances, California Carbon Allowances, and the Regional Greenhouse Gas Initiative CO2 Allowances.
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