It’s no secret that the California Carbon Allowance (CCA) cap-and-trade program remains in extremely high demand. Just last week, California’s carbon allowance auctions sold out for the fourteenth time in a row. Permits sold at $41.76 per ton. This auction alone brought roughly $1.31 billion to the Golden State, according to Politico.
See More: Tap Into Growing Demand for California Carbon Allowances
The success isn’t limited to the auction room. According to a recent KraneShares report, “CCAs ended the year up over 30% and should keep this upward trajectory as the regulator finalizes the reform proposal in the coming months. CCAs are expected to roughly double by the end of the decade though the market could see greater upside if the regulator chooses to increase the reserve tier levels.”
A fund like the KraneShares California Carbon Allowance ETF (KCCA ) gives investors a valuable option for riding the momentum of CCAs. KCCA presents exposure to CCAs through being benchmarked to the IHS Markit Carbon CCA index. The index tracks the CCA credit market through the most traded futures contracts. Additionally, the CCA is also linked to the Quebec market, providing approximately 15% of Quebec’s cap-and-trade credits.
KCCA is currently up 34.51% over one year and has risen 0.82% YTD. The fund is passively managed and operates with a net expense ratio of 0.81%. The fund was also KraneShares’ top-performing ETF in 2023.
Investing in CCAs
Investing in carbon allowances can provide robust diversification for a portfolio. Traditional asset classes often have a lower correlation with CCAs and other allowances. Additionally, KCCA remains an option for hedging against inflation, due to CCAs possessing a price floor that is pegged to inflation rates.
California’s carbon allowance program covers the vast majority of carbon emissions in the state. As a result, KCCA could see continued upside from the state’s push to reduce greenhouse gas emissions.
“Going forward, California is expected to closely follow the U.S.-wide economy, which is expected to grow at a slower pace next year. Regarding the market balance, the positive reaction to the ambitious regulatory agenda has been outweighing the headwinds, with more price support expected as regulations are finalized in 2024 and implemented in 2025,” the KraneShares report added.
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