California Carbon Allowances (KCCA ETF Review)

The prices of California’s carbon emissions are up over 30% in 2021, reaching an all-time high of $23.3 per ton at the last auction. As California tries to achieve carbon-neutrality, the supply of carbon allowances will shrink by 4% each year, which should benefit prices. You can now directly invest in California carbon credits through the KraneShares California Carbon Allowance ETF (KCCA).

SustainFi Updated October 6, 2021

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What are carbon allowances?

Carbon credits or allowances are permissions to pollute given by governments to polluting companies. Carbon credits let polluting businesses emit a certain amount of greenhouse gases like CO2 each year. One allowance equals one metric ton of C02.

Polluters that are better at reducing their emissions can make money by selling residual permits to others. Over time, governments reduce allowances so that companies must cut emissions further.

The world’s first emissions trading scheme was launched by the European Union (EU) in 2005. Since then, many countries and U.S. states, including California, have followed.

🔔 Learn about EU carbon credits and how you can trade them.

An introduction to California Carbon Allowances (CCAs)

Launched in 2012, California’s carbon scheme’s goals were to lower California’s emissions to 1990 levels by 2020 (which California did ahead of schedule in 2016) and to 40% below 1990 levels by 2030. The state puts revenues from the program in the Greenhouse Gas Reduction Fund.

The scheme covers about 85% of the state’s carbon emissions and includes 450 utilities and large industrial facilities like steel manufacturing plants. Industrial facilities and utilities get free allowances that are reduced over time. These companies use some allowances to cover their emissions, and they can sell any remaining allowances at quarterly auctions. (The mechanism and the allocation of free allowances depend on the sector.)

To get covered industries to reduce emissions, the supply of allowances shrinks by 4% annually in 2021-2030.

Companies included in the scheme can meet up to 4% (6% from 2026) of their emissions cap by buying approved offsets, which are carbon credits derived from things like preserving forests and capturing methane. Allowances can also be “banked” or saved for the future, subject to limits.

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The price performance of California Carbon Allowances

  • The amount of allowances is shrinking over time
  • The minimum price at which allowances can be sold is required to rise over time at 5% plus inflation

Source: California Air Resources Board

CCAs are bought at sold at quarterly auctions. (Some of the allowances are sold by utilities that get free allocations; others are sold directly by the state.)

The price of CCAs has more than doubled since the emissions trading scheme was introduced. Prices increased steadily from $10.09 at the first auction in November 2012 to $23.3 at the latest auction held in August 2021. In part, this is because the supply of allowances shrinks over time. Investors have also started to get involved.

Also, there is a limit to how low prices can go because California sets the minimum price at which allowances can be sold at an auction. That price started at $10 per ton in 2012. For 2021, the minimum price is $17.71 per ton, and going forward, the minimum increases by 5% plus inflation as measured by the Consumer Price Index each year. (Beginning in 2021, there is also a $65 price ceiling, increasing at 5% annually plus inflation.)

KraneShares California Carbon Allowance ETF (KCCA)

Individual investors can’t buy allowances directly, so your best bet is investing in the KraneShares California Carbon Allowance ETF (KCCA).

Launched on October 5, 2021, KCCA is benchmarked to the IHS Markit Carbon CCA Index, which tracks the most traded CCA futures contracts. The fund costs 0.79% ($79 annually on a $10,000 investment) and had about $1.2 million in assets at launch. But, given the interest in carbon credits, assets should grow quickly.


There is a larger carbon credit ETF, the KraneShares Global Carbon ETF (KRBN). KRBN invests in European Union Allowances, followed by California Carbon Allowances and RGGI allowances (from the states in the Northeastern U.S). CCAs are around 20% of the fund today.

🔔 Learn more about KRBN.