European Union carbon allowances kicked off the year with a strong start, and remain on the move in February. Investors looking to capture gains happening in Europe’s major carbon markets should consider the KraneShares carbon ETF suite.
2024 proved a tumultuous year for European Union Allowances (EUAs). The EU worked to hammer out reforms and revealed next steps for further tightening. They also expanded emission reductions efforts through the introduction of the Carbon Border Adjustment Mechanism (CBAM) that puts a carbon tax on imports within specific industries. Further tightening trajectories go into effect next year, with tighter carbon allowance supply and more aggressive emission caps.
EUA prices climbed significantly, starting in mid-December. It’s a trend that continues this month, as prices work back towards their more normal 100 euro level.
“European carbon prices are back to about the all-important 80 EUR mark, up 12% YTD and almost 28% since mid-December,” explained Luke Oliver, managing director, head of climate investment at KraneShares, in a communication to VettaFi.
EUAs Could Potentially Reach 100 Euros This Year
One carbon allowance equates to one metric ton of greenhouse gases, and is part of a regulated cap-and-trade carbon program. Market participants must reduce emissions and buy carbon allowances to account for any overages. Through tightening and allowance reductions, the cost to pollute grows higher over time. The funds raised through allowance sales also fund a variety of energy transition efforts.
In the EU, carbon allowances generally carry high correlations to the price of natural gas. However, impending carbon market tightening could lead to more differentiated performance looking ahead. “Gas prices have helped, but the tightening cliff coming in 2026 is a true force here,” Oliver noted. “We could see 100 EUR levels by year end.”
Carbon allowance futures, as with most commodities, carry the potential for elevated volatility. While 2024 proved a challenging and volatile year, a number of supportive factors looking ahead could create tailwinds for EUA prices.
It’s also worth noting that as attention grabbing as the recent performance of EUAs is this year, United Kingdom Allowances performed better. “UK carbon has been even stronger, up 27% YTD,” Oliver revealed.
Invest in European Carbon Markets With KraneShares
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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