Investing in the carbon credit market using ETFs like the KraneShares Global Carbon Strategy ETF – The Average Joe

    Investing in the carbon credit market using ETFs like the KraneShares Global Carbon Strategy ETF

    Victor Lei — Head of Research

    September 22, 2022

    September 22, 2022

    The other solution: Getting companies to pay for their pollution via the growing carbon credit market. Believe in a sustainable future? It’s a market you’ll want to keep an eye on.

    Here’s how carbon markets work:

    1/ Buyers: Companies can buy carbon credits to offset their emissions (i.e., factories, mining).

    2/ Sellers: Those that capture and store emissions (i.e., farms, forest owners) can sell carbon credits.

    Carbon credit prices fluctuate on supply and demand, and the market depends on efforts to keep countries and companies accountable. But there’s a lack of oversight and regulatory standards in the industry.

    How do you keep them accountable? By regulating the market with proper rules and frameworks. There are two main types of carbon offset markets:

    • Compliance — government-regulated markets, such as those found in California and Europe.
    • Voluntary — non-regulated markets with optional participation.

    Both have very different impacts on prices

    Currently, markets are lightly regulated.  Companies are buying the cheapest credits in bulk with varying quality. In 2020, carbon prices averaged $2.50 a ton, and Bloomberg laid out two price scenarios:

    1/ If markets stay voluntary, there could be a flood of low-quality carbon credits. Price target: $11 a ton by 2030.

    2/ If markets are more regulated, companies could only purchase credits that remove CO2. Price target: $224 a ton by 2029.

    The industry could also get a boost thanks to a landmark deal struck at the COP26 conference in 2021. After six years of negotiations, the agreed-upon Article 6 set out rules for a voluntary carbon market.

    Investors: Carbon credit ETF

    Investors can get exposure to the carbon credit markets via ETFs like the KraneShares Global Carbon Strategy ETF (NYSE:KRBN). Instead of holding a basket of stocks:

    • The ETF tracks the IHS Markit Carbon CCA Index — a measure of California’s carbon allowance credit market (i.e., carbon offset prices in California).
    • It’s like investing in the United States Oil ETF (NYSE:USO). But rather than tracking the price of oil, $KRBN tracks the price of carbon credits.

    Since its launch in 2020, the $KRBN ETF has outperformed the S&P 500 — 93% to 21%. The IHS Markit Carbon CCA Index — which has been around since 2014 — has risen 480% (vs. the S&P 500’s 92%). With Article 6 in place, experts see progress, but implementation will be the next challenge.

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