The 29th carbon market auction just recently happened for the California and Quebec California Air Resources Board (CARB), and the results were somewhat surprising.
The auction of the greenhouse gas emissions units saw current vintage emissions being sold for $28.26 USD, a new high, and 2024 vintage emissions units sold out at $34.01 USD, as reported in the press release for the auction.
The auction was oversubscribed for 51%, and one of the more noteworthy features was the general absence of financial participants; instead, the auction was comprised mostly of compliance-related participants at 81% versus a 67% participation in August’s auction, according to Luke Oliver, managing director and head of strategy at KraneShares.
As a result, futures prices in carbon allowances experienced a 12% retracement in markets last Wednesday. Futures prices for carbon allowances had been up and closed at $34.14 on Tuesday, and therefore a pullback based on data from the market was a natural response. “Think of this in the same way as any economic data release being off consensus,” Oliver wrote to ETF Trends.
Oliver sees the sell-off as being rooted in the dynamics of supply and demand and not due to any particular weakness or risk within the space itself. It has provided an opportunity for investors to enter into the space at reduced prices; the carbon allowance market is a space that KraneShares sees as having great opportunity for growth as the focus on emissions reduction continues to expand.
“We continue to believe more frequent auctions, similar to the EU program, would benefit, and reduce event risk, in the US markets. The long-term view remains unchanged and we look forward to supporting clients with their global and California specific carbon investments,” Oliver wrote.
The next auction is slated for Wednesday, February 16, 2022.
Investors Buying the Dip With KCCA
KraneShares has recently expanded carbon allowance investing to offer more targeted investment approaches, including into the California and Quebec market with the KraneShares California Carbon Allowance ETF (KCCA).
Oliver reported that investors have been buying the dip since Friday, with KCCA up 2.85% on Friday and 3.83% already for Monday.
KCCA is a fund that offers exposure to the California cap-and-trade carbon allowance program, one of the fastest-growing carbon allowance programs worldwide, and 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.
The index measures a portfolio of futures contracts on carbon credits issued by the CCA and only includes futures with a maturity in December in the next year or two, while using a wholly-owned subsidiary in the Cayman Islands to prevent investors needing a K-1 for tax purposes.
The fund may also invest in emission allowances issued under another cap-and-trade system, futures contracts that aren’t carbon credit futures, options on futures contracts, swap contracts and other investment companies, and notes that aren’t necessarily exchange-traded.
KCCA carries an expense ratio of 0.79%.
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