How To Invest in Carbon Credits in 2022 (KRBN and Carbon Credit ETF 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. European carbon prices nearly tripled in 2021. Many think prices can still go higher, and you can invest through KRBN and GRN ETFs. But is it too late to get involved?

SustainFi   Updated February 8th, 2022

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NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

KraneShares Global Carbon Strategy ETF (KRBN), an exchange-traded fund (ETF) that tracks the world’s three most liquid markets for carbon credits, was 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, including emissions schemes in the European Union, the U.S., the U.K., New Zealand, and China (from July 2021). According to the World Bank, there are now 65 carbon pricing initiatives. In 2021, they covered over a fifth of the global greenhouse gas emissions. This is in addition to voluntary carbon markets, where companies can buy offsets generated by planting trees or producing renewable energy.

According to Refinitiv, in 2021 the size of the global carbon market reached $851 billion, compared to only $270 billion in 2020. Wood Mackenzie, a consulting firm, expects that the market could reach a breathtaking $22 trillion by 2050.

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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, 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 Celsius. 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 add maritime emissions to the scheme.

If the amount of carbon allowances is 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 amount of allowances. So carbon has implicit “price support” from the EU. In fact, Germany, Europe’s largest economy, is considering creating a €60 a ton “price floor” for carbon credits. This, along with carbon-neutrality goals, makes carbon credits an attractive investment.

In January 2022, the benchmark EU carbon price approached €100 per ton, the record since the allowances were created in 2005. However, many analysts and hedge funders think prices can still go higher. And according to the Organization for Economic Cooperation and Development, a carbon price of $147 a ton is needed by 2030 to get to net zero by 2050.

EU Carbon Credits (December 2022 Futures)

Source: ICE

🔔 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 almost 60% in 2021, and they could rise further because supply must legally shrink by 4% each year. California also sets a minimum price that goes up by 5% plus inflation each year.

🔔 Learn how you can 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.

🔔 Learn more about RGGI.

UK Allowances (UKA)

UK carbon allowances were launched in May 2021 with a floor of £22 per ton. Demand for allowances was strong, with prices reaching £75 ($101) per ton in December 2021. You can get some exposure to UK allowances through the KRBN ETF.

How to invest in carbon credits: carbon credit ETFs

More U.S. investors are getting involved in trading carbon credits. If you are not a hedge fund, you can participate by investing in the KraneShares Global Carbon Strategy ETF (KRBN), an ETF that went from zero to over $1.8 billion in assets between its launch in July 2020 and February 2022. KRBN invests in futures tracking carbon credits in the European Union, California, RGGI, and the new U.K. market.

KRBN ETF was up over 100% in 2021

In October 2021, KraneShares added two more carbon ETFs targeting European and Californian allowances:

  • KraneShares European Carbon Allowance Strategy ETF (KEUA)
  • KraneShares California Carbon Allowance Strategy ETF (KCCA)

The remaining option is iPath Series B Carbon ETN (GRN), an exchange-traded note that mostly tracks European Union carbon credits.

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Carbon credit ETF comparison

TickerKRBNKCCAKEUAGRN
FundKraneShares Global Carbon Strategy ETFKraneShares California Carbon Allowance Strategy ETFKraneShares European Carbon Allowance Strategy ETFiPath Series B Carbon ETN
TypeExchange-traded fundExchange-traded fundExchange-traded fundExchange-traded note
Date Launched2020202120212019
Assets$1,860 million$118 million$35 million$169 million
Expense ratio0.78%0.79%0.79%0.75%
2021 Performance108%nana164%
InvestmentsEuropean Union, California, UK, RGGI carbon futuresCalifornia carbon futuresEuropean Union carbon futuresEuropean Union carbon futures

Data as of 2/8/2022

Both KRBN and GRN performed well in 2021, though GRN did better because it mostly owns European Union carbon credit futures, which have rallied. KRBN is more diversified, hurting 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 and GRN, which have already done very well.

KraneShares Global Carbon Strategy ETF (KRBN)

The KraneShares Global Carbon Strategy ETF (KRBN) began trading in July 2020 and is up 174% since then. The ETF tracks the IHS Markit Global Carbon index, reflecting the volume-weighted carbon price in the EU, California, the U.K., and the northeastern U.S. The fund is listed on the New York Stock Exchange and you can invest through brokers and apps.

As of February 2022, around two-thirds of the ETF is invested in European Union Allowance futures, followed by California Carbon Allowances, U.K., and RGGI allowances. Here are the current weights by region:

  • European Union carbon credits: 67%
  • California carbon credits: 23%
  • RGGI carbon credits : 5%
  • U.K. carbon credits: 5%

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.) The U.K. market was added in December 2021.

KRBN was developed with the help of the 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.

KraneShares European Carbon Allowance Strategy ETF (KEUA)

On October 5, 2021, ETF provider KraneShares launched an ETF exclusively focused on European carbon credits, the KraneShares European Carbon Allowance Strategy 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). It has already attracted $35 million in assets. Learn more about investing in KEUA.

KraneShares California Carbon Allowance Strategy 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 has $118 million in assets. 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, which tracks EU carbon prices.

GRN launched in 2019 and is up over 164% 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.

How to invest in carbon credits: carbon credit futures

The most popular carbon credits, including European Union Allowances and California Carbon Allowances, have futures listed on exchanges such as ICE. Futures contracts are financial instruments that track the prices of the underlying carbon credits.

However, futures contracts have expiry dates and may be very complicated for individual investors to trade. Most brokers won’t even support them. Investing through a carbon credit ETF – which will invest in futures – is just much easier and more accessible.

The risks of carbon credits

Carbon credits are not a one-way bet. You should remember that there is no physical commodity, like gold or natural gas, that backs them up. Carbon credits are a political construct designed by entities like the European Union, the U.K., or California. So their existence – and their prices – depends on the goodwill of the regulators.

Some politicians have blamed high energy prices in Europe on the existence of the carbon trading schemes, which, they argued, pushed electricity prices up for regular people. There have been calls for the EU to curb speculation in the carbon markets. And if prices rise too high, there is always a risk that governments can intervene.

For example, in Europe, the government can create additional allowances to push prices down if they stay too high for a period of time.

💰 Takeaway

  • Investing in carbon is one way you can invest in the climate transition. Carbon credit investing has been very profitable, and you can benefit from tightening carbon emissions regulations worldwide. You could even say that you are helping the environment by making it more expensive to pollute
  • Carbon investing helps diversify your portfolio due to low correlations with asset classes like stocks or bonds
  • However, carbon credits are risky commodities that can be volatile. They are essentially paper constructs that rely on government backing. So they belong in a diversified investment portfolio with other types of assets

🔔 Interested in other green investments? Check out the top electric vehicle ETFs.

NOT INVESTMENT ADVICE. The content is for informational purposes only; you should not construe any such information as investment advice.

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Frequently Asked Questions

What is the current price of carbon credits?

There are multiple markets for carbon credits. As of February 8, 2022, carbon credit prices per ton in some of these markets were as follows:
European Union Allowances (EUA): €94/ ton
California Carbon Allowances (CCA): $29 / ton
Region Greenhouse Gas Initiative (RGGI) Allowances: $13/ ton

Can you trade carbon credits?

Although individual investors can’t buy carbon credits directly, you can invest through several exchange-traded funds like the KraneShares Global Carbon Strategy ETF (KRBN). You can also buy carbon credit futures, but that may be quite challenging if you aren’t a professional trader.

Can you make money from carbon credits?

Several funds that invest in carbon credits, like KRBN and GRN, were up over 100% in 2021. Investors who bought these funds earlier in the year would have made money. But past performance doesn’t guarantee future performance.

What is the KRBN ETF?

The KraneShares Global Carbon Strategy ETF (KRBN) is an exchange-traded fund that invests in carbon allowances issued by the European Union, California, the U.K., and several states in the Eastern U.S.

Are carbon credits worth anything?

There are several markets for carbon credits around the world. Carbon credits change hands for different prices, so yes, they are worth quite a lot in some markets. In the European Union, carbon credits currently trade for over €90 per ton.