How You Can Invest in Carbon Credits in 2021 (KRBN and GRN Review)
Carbon credits, the permissions to emit carbon and other greenhouse gases, have been one of the best-performing commodities over the past five years. Many think prices can still go much higher. You can invest through KRBN and GRN ETFs. But is it too late to get involved?
SustainFi Updated October 6, 2021
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KFA Global Carbon ETF (KRBN), an exchange-traded fund (ETF) that tracks the world’s three most liquid markets for carbon credits, is one of the fastest-growing ETFs in 2021. The fund’s backers say you can bet on carbon prices while supporting action against climate change.
What are carbon credits?
The purpose of carbon credits is to make companies reduce emissions over time in an efficient way.
Carbon credits or allowances are permissions to pollute given by governments to polluting companies like utilities and cement manufacturers. Carbon credits let polluting businesses emit a certain amount of greenhouse gases each year. Polluters that are better at reducing their emissions can make money by selling residual permits to others. Over time, governments can reduce allowances forcing companies to be more efficient by investing in green technologies.
Back in 1997, the Kyoto Protocol’s Clean Development Mechanism tried to set up a global carbon credit trading system. That program never took off, and some of the world’s largest polluters like India have not implemented carbon trading schemes.
However, several regional schemes gained ground instead. Three notable schemes are around today, including one in the European Union and two in the U.S. The UK launched its scheme in May 2021 and China in July 2021.
The EU’s Emission Trading System (EU ETS)
The European Union launched its carbon emissions trading system in 2005, allowing the trade in European Union Allowances (EUAs). Today it is the world’s second largest carbon market (after China’s), covering over 10,000 energy-using facilities. The scheme puts a price on carbon and covers around 40% of emissions from the EU bloc, mostly from utilities and large industrials like steel producers and chemical plants.
As part of the European Green Deal, the EU plans to be carbon-neutral by 2050, which scientists say must be achieved to limit global warming to 1.5 degrees Celcius. The EU also set a medium-term goal of reducing 2030 carbon emissions by at least 55% versus 1990 levels (from 40% previously). Carbon credits are critical in achieving these goals.
In July 2021, the European Commission proposed more ambitious pollution cuts, including legislation to reduce the supply of carbon allowances and adding maritime emissions to the scheme.
If carbon allowances are reduced, their prices will go up. Higher prices will incentivize polluters to decarbonize faster. Further, if for any reason carbon prices drop too low, the EU can reduce the allowances. So carbon has implicit “price support” from the EU. This, along with carbon-neutrality goals, makes carbon credits an attractive investment.
In September 2021, the benchmark EU carbon price hit €61 per ton, the absolute record since the allowances were created in 2005. However, many think prices can still go much higher. Royal Dutch Shell estimates that prices need to be over $200 a ton by 2050 for the EU to get to carbon neutrality. BP’s forecast assumes $100 a ton from 2030.
EU Carbon Credits (December 2021 Futures)
🔔 There is a new ETF that lets you directly invest in EUAs. Learn about the KEUA ETF.
California Carbon Allowances (CCA)
Established in 2012, California’s carbon emissions trading program covers power plants as well as manufacturers, refiners, and other polluting industries. CCA prices increased by over 30% year-to-date through August 2021, and they are poised to rise further as supply must legally shrink by 4% each year. California also sets a minimum price for allowances that goes up by 5% plus inflation each year.
🔔 Learn how you can exclusively invest in CCAs.
Regional Greenhouse Gas Initiative (RGGI)
Introduced in 2009, RGGI (pronounced “Reggie”) is a carbon emissions trading effort among 11 states in the northeast of the United States, including Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont, and Virginia. As part of the scheme, permits are auctioned off to power plants. The program is more modest in scope than California’s, though prices have been increasing.
Make an impact with your money
How to invest in carbon credits
More U.S. investors are getting involved in trading carbon credits. If you are not a hedge fund, you can still participate by investing in KFA Global Carbon ETF, an ETF that went from zero to over $980 million in assets between its launch in July 2020 and October 2021. The fund is already up over 69% in 2021. KRBN invests in carbon credits in all three markets, the European Union, California, and RGGI.
KRBN ETF is up 69% in 2021
In October 2021, KraneShares added two more carbon ETFs targeting European and Californian allowances:
The remaining option is iPath Series B Carbon ETN (GRN), an exchange-traded note that mostly tracks European Union carbon credits.
Carbon Credit Fund Comparison
|Fund||KraneShares Global Carbon ETF||KraneShares California Carbon Allowance ETF||KraneShares European Carbon Allowance ETF||iPath Series B Carbon ETN|
|Type||Exchange-traded fund||Exchange-traded fund||Exchange-traded fund||Exchange-traded note|
|Assets||$988 million||$1 million||$4 million||$76 million|
|Investments||European Union, California, RGGI carbon futures||California carbon futures||European Union carbon futures||European Union carbon futures|
Data as of 10/6/2021
Both KRBN and GRN performed well year-to-date, though GRN did better because it mostly owns European Union carbon credits, which have rallied. KRBN is more diversified, which hurt it on a relative basis. Going forward, you may want to consider KRBN or KCCA which may have more room to run, rather than KEUA or GRN, which have already done very well.
KFA Global Carbon ETF (KRBN)
The KFA Global Carbon ETF (KRBN) began trading in July 2020 and is up 110% since then. The ETF tracks the IHS Markit Global Carbon index, reflecting the volume-weighted carbon price in the EU, California, and the northeastern U.S. The fund is listed on the New York Stock Exchange and you can invest through brokers and apps like Public.
Roughly two-thirds of the ETF is invested in European Union Allowances, followed by California Carbon Allowances and RGGI allowances. No region can be more than 65% of the fund, and the minimum weight is 10%.
|Carbon allowance type||Current exposure in $m||% Assets|
|European Union Allowance (EUA) 2021 Future||$366||68.3%|
|California Carbon Allowance (CCA) Vintage 2021 Future||$84||15.8%|
|Regional Greenhouse Gas Initiative (RGGI) Vintage 2021 Future||$40||7.5%|
|European Union Allowance (EUA) 2022 Future||$31||5.7%|
|California Carbon Allowance (CCA) Vintage 2022 Future||$21||3.9%|
Source: KraneShares. Data as of 7/30/2021
The region weights that are rebalanced annually are as follows:
- EU ETS: 65%
- CCA: 25%
- RGGI: 10%
KraneShares is a specialist in Chinese ETFs, and China may be added to the index in the future. (China established a carbon emissions trading system in July 2021.) Other carbon credit markets can also be added if large enough.
KRBN was developed with the help of environmental finance boutique Climate Finance Partners. The U.S. climate envoy and former Secretary of State, John Kerry, was recently Advisory Board Chairman. Robert Engle, a Nobel Prize-winning economist and climate change thought leader, continues to serve on the Advisory Board.
KRBN investors will benefit as the price of carbon emissions goes up. In addition, the fund offers portfolio diversification benefits because carbon futures (contracts linked to the value of emission allowances) have historically had low correlations with other asset classes like stocks or bonds.
Make an impact with your money
KraneShares European Carbon Allowance ETF (KEUA)
On October 5, 2021, ETF provider KraneShares launched an ETF exclusively focused on European carbon credits, the KraneShares European Carbon Allowance ETF (KEUA). KEUA is benchmarked to the IHS Markit Carbon EUA Index, which tracks the most traded EUA futures contracts. The fund costs 0.79% ($79 annually on a $10,000 investment) and had about $4 million in assets at launch. Learn more about investing in KEUA.
KraneShares California Carbon Allowance ETF (KCCA)
Also 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. Learn more about investing in KCCA.
iPath Series B Carbon ETN (GRN)
GRN offers exposure to global carbon markets as represented by the Barclays Global Carbon II Index. The index tracks carbon prices from the EU and the Kyoto Protocol’s Clean Development Mechanism (CDM). (In practice, it is mostly linked to the performance of the EU carbon credits; the future of the CDM market is currently uncertain.)
GRN launched in 2019 and is up 90% in 2021 alone.
Although both KEUA and GRN invest in EUAs and cost roughly the same, we prefer the ETF structure to the ETN, and, therefore, KEUA to GRN. With the ETF, you own the assets the fund invests in, with the ETN, you do not. ETNs tend to be less popular overall.
Note: Unlike KRBN and KEUA, which are ETFs, GRN is an exchange-traded note (ETN). ETNs are structured differently from ETFs – an ETN is a promissory note (a promise to pay) issued by a bank, in this case, Barclays. Unlike an ETF, which buys and holds the underlying securities, an ETN doesn’t own anything. The Note’s backer (Barclays) promises to pay the return of the index. Since the ETN does not hold securities, it can match the return of the index perfectly, eliminating tracking error. However, an ETN carries the credit risk of the issuer, so if Barclays goes bankrupt, investors may not get their money back.
- Investing in carbon is a good way to invest in the climate transition
- You can benefit from tightening carbon emissions regulations worldwide
- Carbon investing helps diversify your portfolio due to low correlations with asset classes like stocks or bonds
🔔 Interested in other green investments? Learn how to invest in green bonds.