Since the introduction of the first carbon allowances ETF in 2020, the KraneShares Global Carbon Strategy ETF (KRBN ), carbon allowance ETFs have attracted over $730 million in net flows. Nearly $247 million of that comes from investment into the joint California and Quebec carbon market, and for good reason.
“We saw a big year for California last year, a lot of climate bills got approved,” explained Bo Qin, lead carbon analyst at BloombergNEF, at the KraneShares Global Climate and Carbon Investment Summit earlier this month. This legislation included the passage of a more aggressive net-zero timeline of 2045, the prohibition of internal combustion engine cars beyond 2035, and more.
Market to Shift from Oversupply to Undersupply in 2024
Noteworthy amongst all of the climate legislation was a new target of 48% emissions reduction by 2030 compared to previous plans of 40%. Although rulemaking to adjust the carbon markets for the new plans is still ongoing, BloombergNEF estimates emission cap reductions for the shared market equating to 218 million metric tons by 2030. This will eliminate the current oversupply as early as next year.
“We’ll see the linear reduction factor for California moving up from 4% to 5%,” Qin said. “What this means for the market balance is that we’ll see the market move from annually an oversupplied market to an undersupplied market next year.”
California’s carbon market is a strong entry point for investors seeking diversification. It offers greater liquidity than smaller markets but remains at an attractive and accessible price point for a broader range of investors.
BloombergNEF estimates California carbon allowances will reach $63 by 2030, up from an estimated $32 this year.
“We do expect some softness between ’26 and’28 and that is a result of the Inflation Reduction Act,” Qin explained. Other contributors include “complimentary policies to bring more renewables online and the EV adoption to be kicked in between those years.”
Investing in California Carbon Allowance Potential With KCCA
Despite recent dips this week in trading, the KraneShares California Carbon Allowance ETF (KCCA ) remains solidly in buy territory. The fund remains above both its 50-day SMA as well as its 200-Day SMA.
KCCA offers targeted exposure to the joint California and Quebec carbon allowance markets. It will benefit from California’s aggressive push to reduce emissions alongside the increasing demand for allowances within the market.
This market is one of the fastest-growing carbon allowance programs worldwide. Its benchmark is the IHS Markit Carbon CCA Index. The index includes up to 15% of the carbon credits from Quebec’s market.
KCCA’s index measures a portfolio of futures contracts on carbon credits issued by the CCA. The index only includes futures with a maturity in December in the next year or two. The fund also uses a wholly-owned subsidiary in the Cayman Islands, which makes a K-1 unnecessary for taxes.
KCCA carries an expense ratio of 0.78%.
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