Natural gas prices in Europe proved volatile for much of the first quarter on potential peace talks and lower seasonal demand. EU carbon allowances, closely correlated to natural gas prices, proved equally volatile, but offer a notable long-term investment case.
Rising European natural gas prices in January began declining in February and March on proposed peace talks between Russia and Ukraine, facilitated by President Trump. The on-again off-again nature of those peace talks also creates added uncertainty, compounded by tariff volatility in markets. Meanwhile, reduced natural gas demand due to seasonality added to price declines.
“The onset of the so-called shoulder season, when demand for natural gas begins to decline ahead of the summer season, also dampened prices,” KraneShares explained in the Climate Market Now blog.
European carbon allowances (EUAs) fell for much of February before beginning to recover in March. KraneShares attributes some of those declines to investment funds moving from overwhelmingly long positions at the beginning of February to cutting almost a third of those positions by mid-March. It’s a move that echoes what’s happening on the natural gas side.
As with most global markets right now, news headlines continue to add to market uncertainty. Changing geopolitical risks, tariff war threats, and more add to the complexity — and volatility — in markets. Specific to the EU, the European Commission’s current work to reduce natural gas price volatility by changing gas storage mandates adds to investor uncertainty.
“These headlines are leading to a cocktail of volatility that is persuading many traders to adopt a risk-off position across commodity markets,” noted KraneShares.
Capturing Long-Term Opportunity in EU Carbon Markets
“Traders are confident that the steep decline in EUAs over the past few days represents the liquidation of a portion of investment funds’ length, but they have warned that this length has been particularly ‘sticky’ and has largely resisted previous steep price falls,” KraneShares revealed in last week’s blog.
Impending tightening in European carbon allowance markets could create more differentiated performance from natural gas looking ahead. With tightening set to kick off in 2026, investors can capture exposure to the space ahead of potential regulatory tailwinds.
Advisors and investors looking to gain access to the market can do so through two different ETFs. The KraneShares European Carbon Allowance Strategy ETF (KEUA ) offers targeted exposure to the EU carbon allowances market and is actively managed. By gaining exposure to EUAs, investors bring added diversification potential to their portfolios through international exposure, as well as commodity exposure.
The fund’s benchmark is the S&P Carbon Credit EUA Index. The benchmark tracks the most-traded EUA futures contracts, the oldest and most liquid carbon allowances market. Currently, the market covers roughly 40% of all EU emissions, including 27 member states and Norway, Iceland, and Liechtenstein.
The KraneShares Global Carbon Strategy ETF (KRBN ) 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.
KRBN includes contracts from the European Union Allowances and California Carbon Allowances. It also includes the RGGI markets and the United Kingdom Allowances. KRBN also now invests in the Washington cap-and-trade program, with a 5% allocation.
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