California’s cap-and-trade program continues to tighten and set aggressive emissions targets, creating potential positive price pressures for carbon allowances looking ahead that provides opportunities for investors seeking diversification benefits for portfolios while investing in an ETF with strong buy signals.
Carbon allowances represent one metric ton of carbon dioxide emission and are the units that cap-and-trade programs transact in. Participants within these regulated markets, such as California, are allotted an amount of emissions each year and are issued carbon allowances to cover that by the regulator on an annual basis. If the company exceeds those limits, they must buy additional allowances to cover, and as the market tightens and allowance supply is reduced, the cost to pollute rises.
California has proposed aggressive net-zero emissions goals to reduce emissions by 2045, and continues to enact tightening measures for many of its industries. In fact, the state just became the first in the U.S. to set emissions limits for trains, and has set new goals to accelerate zero-emissions heavy-duty and medium-duty vehicles, and limits access to ports and railyards to only zero-emissions vehicles by 2035.
“This locomotive rule is going to have one of the biggest impacts I’d say out of any of California’s clean air regulations,” Yasmine Agelidis, senior associate attorney for the environmental nonprofit Earthjustice, told LA Times. “Locomotives have not been regulated by any entity at the state, federal or local level in the past 15 years, so railroads have been allowed to pollute recklessly.”
The state continues to tighten as it focuses to bring down emissions, and has proposed a number of tightening measures for its carbon allowances market that would create positive underlying price pressures for allowances.
Investing in California’s Carbon Allowances with KCCA
The (KCCA ) offers targeted exposure to the joint California and Quebec carbon allowance markets and will benefit from California’s aggressive push to reduce emissions alongside the increasing demand for allowances within the market. Carbon allowance investing is worth consideration for the diversification benefits that they can bring portfolios as well as the strong long-term outlook.
KCCA is currently up 5.86% YTD and is above both its 50-day Simple Moving Average as well as its 200-day SMA, strong buy signals for trend followers.
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 from needing a K-1 for tax purposes.
KCCA carries an expense ratio of 0.78%.
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