This year continues to prove a challenging one for global carbon markets in the short-term. However, recent price action in UK carbon allowance market, alongside investment fund support, make the market worth consideration moving into fall months.
United Kingdom Allowances (UKAs) fell as much as 20% over the summer but rallied in the last month, reported KraneShares’ Climate Market Now blog. UKAs rose more than 7% and sit less than 10% below last quarter’s closing price.
While the larger EU market’s allowances remain pressured, “UKAs have found support from investment funds, who currently hold close to a record-long position in futures contracts,” KraneShares explained.
See also: Carbon Investing: ‘Where the Rubber Meets the Road’
Alongside investment fund support, investors anticipate potential supportive measures this fall from the recently elected Labour government. No reforms have been announced yet. However, investors are hopeful that the new climate and energy minister will announce mechanisms that could prove supportive for UK’s carbon market as a whole.
Speculation of UK Allowance Market Reforms
Chief amongst potential reforms is a Supply Adjustment Mechanism similar to that of what the EU market currently employs. This type of mechanism removes allowances from the market’s oversupply annually. In the EU, it’s resulted in the removal of over 1.6 billion EUAs. “Its introduction in 2019 was instrumental in boosting the price of EUAs from less than €10/tonne and setting it on a path to top €100 as recently as 2023,” KraneShares noted.
The creation of a similar mechanism in the UK carbon market could prove beneficial for long-term prices. Another potential reform discussed by market stakeholders include increasing the auction reserve price. Still more possible reforms include the inclusion of the waste sector in the market and allowing the use of greenhouse gas removal for compliance purposes.
“All the while, there is a steady drumbeat of encouragement from industry and its allies to link the UK ETS to its larger neighbor. The UK ETS is about 10% of the size of the EU market,” explained KraneShares. The “participants in the British system are keen to access the greater liquidity and pool of allowances in the larger market.”
Linking the two markets remains purely speculative for now. That said, potential reforms of the UK market could prove favorable in the long-term if enacted.
Investors seeking to capture opportunity within the UK carbon market should consider the KraneShares Global Carbon Strategy ETF (KRBN ). The fund was the first of its kind to offer an investment take on carbon credits trading. The fund tracks the S&P Global Carbon Credit Index, which follows the world’s most liquid carbon credit futures contracts.
This includes contracts from the European Union Allowances and California Carbon Allowances. It also includes the RGGI markets and the United Kingdom Allowances. KRBN carries a management fee of 0.79%.
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