The first half of 2022 saw markets mired in lingering supply chain issues brought on by the pandemic, related lockdowns in China, and the geopolitical impacts of Russia’s war on Ukraine. US markets were particularly challenged by historically persistent inflation and an environment of rising rates alongside the Fed’s quantitative tightening.
To say markets have been volatile might be to say one of the most obvious things this year. It’s worth noting that at a time when it seems like so many traditional asset classes and inflation hedges have fallen, rebounded, struggled, or completely fallen, finding these performance and stability gems can be meaningful.
Enter the carbon markets in 2022. The KraneShares Global Carbon ETF (NYSE: KRBN), a fund that tracks the world’s largest and most established carbon cap-and-trade markets, is currently trading about 30% higher than this time last year, S&P Global reported. Additionally, the voluntary carbon market has matured, and current renewable energy credits and nature-based avoidance credits are trading about 74% higher than they were last summer.
“Unlike cryptocurrency or Bitcoin, the carbon market is backed by an existentially significant intrinsic demand for the end use of the product – a carbon credit exists to be withdrawn,” said Rich Gilmore, CEO of Carbon Growth Partners. . “Our view is that there is a stable and growing demand for carbon credits to be used as a tool to reduce emissions.”
In the current regime where energy is at a huge spike, the very profitability of energy companies is driving the stability of carbon markets. Additionally, growing commitments to net-zero emissions by industries in the months and years to come are expected to drive the acceleration of carbon markets globally.
“Companies that emit the most emissions are currently extremely profitable,” said Adam Raphaely, general manager of Mercuria Energy America. “If I think back to the financial crisis of 2008, when the [voluntary carbon] market was trying to get going, you had a lot of people without the wherewithal to meet their commitments, whereas now a lot of the larger issuers are very profitable and have significant commitments that are not reversible.
Investing in the Carbon Transition with KRBN and KSET
The KraneShares Global Carbon ETF (NYSE: KRBN) offers the first-of-its-kind approach to carbon credits through cap-and-trade programs and is able to capture rising carbon allowance prices as emissions limits become stricter globally world and for countries to tackle the carbon crisis.
KRBN tracks the IHS Markit Global Carbon Index, which tracks the world’s most liquid carbon credit futures. This includes contracts from the European Union (EUA), California Carbon Allowances (CCA) and Regional Greenhouse Gas Initiative (RGGI) markets. North American price data is provided by IHS Markit’s OPIS service, while European prices are provided by ICE Futures Pricing.
KRBN has an expense ratio of 0.78% and has net assets of nearly $1.1 billion.
The KraneShares Global Carbon Offset Strategy ETF (KSET) is the first US-listed ETF offering investors exposure to voluntary carbon markets. The fund is structured to provide global coverage of voluntary carbon markets by tracking carbon offset futures consisting of nature-based global emissions offsets (N-GEO) as well as global emissions offsets (GEO) which are traded through the CME group.
Projects that can be found in voluntary carbon markets include traditional carbon capture approaches through reforestation and similar efforts, as well as newer, technology-driven projects such as direct air capture.
KSET is structured so that new markets are included in the fund as they grow in size, and it has an expense ratio of 0.79%.
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