Global Indicators Point to Carbon Upswing

The European Union Allowances (EUA) carbon allowance program has encountered early headwinds in 2024.  Yet the price of natural gas has reached its lowest price in two years.

“The macroeconomic outlook is widely believed to be brightening, with the prospect of reductions in interest rates later this year. This could lead to an upsurge in investment in Europe and a resumption of industrial growth. The outlook for EUA prices mirrors the macro outlook. Analysts are almost unanimous in their calls for EUA prices to bottom out this spring and begin to rally later in the year and into 2025,” recent KraneShares research noted.

This optimism is not just limited to Europe. Back in the U.S., the California Carbon Allowance (CCA) cap-and-trade program is expected to see some alterations to account for goals of higher emissions reduction by 2023.

“State regulators are currently working on reforms to the market that will shrink the cap, which will lead to higher CCA prices. With this comes a faster absorption of the market’s existing surplus, turning the market net short of allowances after 10 years of annual excess supply,” the KraneShares research added.

For broad exposure to the carbon allowance markets, investors could consider the KraneShares Global Carbon Strategy ETF (KRBN ). The fund is indexed to the IHS Markit Global Carbon Index. This index’s wide coverage of North American and European carbon allowance programs includes EUAs and CCAs, while also following the Regional Greenhouse Gas Initiative (RGGI), and United Kingdom Allowances (UKA).

The fund’s inclusive exposure to cap-and-trade programs can help investors capitalize on broad movements in the global carbon market. KRBN operates with a net expense ratio of 0.79% and currently has $318.4 million in AUM. While optimism is mounting in the carbon market, KRBN is down 3.53% over the last month.

For more targeted investment, KraneShares offers funds that focus on specific carbon allowance programs. The KraneShares European Carbon Allowance Strategy ETF (KEUA ) provides specific exposure to EUAs, while the KraneShares California Carbon Allowance Strategy ETF (KCCA ) harnesses the potential of CCAs.

KraneShares’ Head of Climate Investments and Head of Strategy Luke Oliver recently told VettaFi that both California and Europe are good choices for carbon investors this year.

“I would be acquiring California and Europe over the next six months. In California, you’d be buying on the way up, and there might be a pullback, so you want to average in and pick some of that up," he said. "If it keeps going up, you’ve missed out on some downside, but you’ve managed your risk a little bit. In Europe, you just want to average in, because it might go lower than this. That’s OK, because when the market turns, all the shorts have to come out.”

KraneShares currently has 30 ETFs listed in the United States. These funds represent over $6.8 billion in assets under management.

For more news, information, and analysis, visit the Climate Insights Channel.