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Global Demand for Carbon Credits Is Rising: 13 Carbon ETFs You Should Consider Investing in Today

Blake Desaulniers
April 4, 2022

Nobody here is going to try to convince anybody else that climate change is real. Real or not, man-made or not—no matter. My guess is since you’re looking at this article, you can see the profit potential in the business of decarbonization.

Nonetheless, an overwhelming majority of experts express a high degree of confidence that man-made climate change is very real.

That widely accepted view is driving the long-term, secular trend to a low-carbon emissions economy. Long-term, secular trend—some of my favorite words.

Decarbonizing operations is becoming increasingly important everywhere as pressure for companies to address climate change intensifies.

Three core drivers of decarbonization include greater policy reforms around regulating emissions, increasing inflows into ESG and impact investments, and technological advancements driving down costs for renewables.

Moreover, it is expected that sectors with very high emissions will face substantial impact on demand, production cost, employment, and cost of capital as the cost of CO2 emissions continue to rise.

So whether you’re a climate activist or a climate “denier” is of zero consequence. What matters is the high degree of certainty that investing in decarbonization offers an opportunity for what could become outstanding profit potential. Always remember, the trend is your friend.

The question is, of course: how does the savvy investor take advantage of the trend, or in this case, the carbon credit trend?

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What Is a Carbon Credit

Global energy demand is expected grow +50 percent by 2050, yet 80 percent of the world’s energy is still derived from fossil fuels.

Meeting carbon reduction goals is becoming increasingly important for a growing number of companies, including those with publicly traded shares who face ever more stringent environmental, social, and governance requirements from exchanges and regulators, as well as the real cost of the push from rapidly spreading carbon pricing mechanisms.

The rising cost of carbon pollution has been driving, and will continue to drive, growth in the market for carbon credits. This is a fact!

A carbon credit is a transferable instrument certified by independent entities or governments, and each credit represents a reduction of one metric ton of carbon dioxide.

Companies that can’t meet carbon reduction targets can buy carbon credits from other companies that exceed carbon reduction goals and use those carbon credits to meet regulatory or voluntary requirements for their own operations. The exchange or trade of carbon credits between companies provides the opportunity for XYZ company that is not meeting its minimum threshold to now become carbon compliant. This is big business.

A carbon credit represents a project that helps to mitigate climate change—such as preserving a forest that was slated to be cleared or producing a battery electric vehicle. Tesla, for example, earns hundreds of millions annually from the sale of carbon credits. After purchasing a credit, a company can “retire” the credit to claim a reduction in their own greenhouse gas emissions.

Carbon credit pricing is based on supply and demand. With expanding regulatory requirements and a growing number of jurisdictions invoking new carbon reduction goals, it is widely anticipated that the market for carbon credits will continue to grow and that demand pressure will be a significant factor. As the cost of carbon pollution rises higher, carbon credit pricing should and would follow.

The Taskforce on Scaling Voluntary Carbon Markets, a private sector-led initiative working to scale an effective and efficient voluntary carbon market to help meet the goals of the Paris Agreement, estimates that demand in the voluntary market for carbon credits could increase by a factor of 15 or more by 2030 and by a factor of up to 100 by 2050. McKinsey & Company estimates the market for voluntary carbon credits could be worth upward of US$50 billion in 2030. [1]

Emission Trading Systems (ETS), also commonly referred to as cap-and-trade systems, set a cap on greenhouse gas (GHG) emissions that decline annually to achieve the climate goals of its jurisdiction or members.

According to the World Bank, there are 28 ETSs operating worldwide that collectively cover 9 gigatons of carbon dioxide equivalent (Gt CO2e), representing 17 percent of global GHG emissions. Global carbon compliance markets were valued at $217 billion in 2019, having quintupled over a two-year period.

While buying and selling carbon credits between net producers and net users is one thing, participation in this market by retail investors is a different story. Most of us are not going to go into the business of brokering carbon credits. So what options do us capital market investors have?

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13 Carbon ETFs to Consider

For an individual investor like me, carbon credit ETFs, or ETFs that derive value from carbon reduction enterprises, are the most obvious answer today.

A range of carbon ETFs differentiate across a number of factors, including geographic orientation and nature of holdings. Yes, there are real differences among them, so selection is certainly a factor.

 

Carbon Streaming Corporation

According to its profile, Carbon Streaming Corporation (OTC: OFSTF) operates as an environmental, social, and governance principled investment vehicle that provides investors with exposure to carbon credits.

The company focuses on acquiring, managing, and growing a diversified portfolio of investments in projects and/or companies that generate or are actively involved, directly or indirectly, with voluntary and/or compliance carbon credits. It invests capital through carbon credit streaming arrangements with project developers and owners to accelerate the creation of carbon offset projects.

Carbon Streaming Corporation’s strategy will involve taking advantage of supply, demand, and pricing anomalies to build a long-term portfolio for capital appreciation, and its primary focus will be purchasing compliance credits from three Electronic Transaction Systems (ETS):

1. The European Union emission trading system (EU ETS), which is the world’s largest carbon pricing system.

2. The California-Québec linkage under the Western Climate Initiative (WCI).

These two systems were the first ones established to cover their respective jurisdictions independent of their country’s climate initiatives.

3. The Regional Greenhouse Gas Initiative (RGGI), a collaborative initiative comprising 10 states that was the first market-based carbon pricing system in the United States to cap and reduce CO2 emissions from the power sector. [2]

 

 

iPath Series B Carbon ETN

iPath Series B Carbon Exchange Traded Notes (NYSE: GRN) links the return of performance based on the Barclays Global Carbon II TR USD Index.

This index provides exposure to the price of carbon as measured by the return of futures contracts on carbon emissions credits from two of the world’s major emissions-related mechanisms through futures contracts that trade on the ICE Futures Europe exchange. [3]

 

 

Kraneshares

KraneShares offers a number of vehicles, including KraneShares California Carbon Allowance Strategy ETF (NYSE: KCCA), KraneShares Global Carbon ETF (NYSE: KRBN), KraneShares European Carbon Allowance ETF (NYSE: KEUA) and KraneShares Global Carbon Transformation ETF (NYSE: KGHG). [4]

The KraneShares California Carbon Allowance Strategy ETF (NYSE: KCCA) provides targeted exposure to the California Carbon Allowances (CCA) cap-and-trade carbon allowance program. The ETF is benchmarked to IHS Markit’s Global Carbon Index, the first benchmarking and liquid investable index to track carbon credits markets globally. The index offers broad coverage of cap-and-trade carbon allowances by tracking the most traded carbon credit futures contracts. [5]

Currently the index covers the major European and North American cap-and-trade programs: European Union Allowances (EUA), California Carbon Allowances (CCA), the Regional Greenhouse Gas Initiative (RGGI), and United Kingdom Allowances (UKA).

 

 

KraneShares Global Carbon ETF (NYSE: KRBN) focuses on companies in traditionally high-emissions industries that are now making the transition away from fossil fuels to renewables. Companies in high-impact industries that have a stated commitment and have taken action towards decarbonization are expected to see superior growth compared to their peers, as well as benefitting from a reevaluation and better environmental, social, and corporate governance (ESG) score.

 

 

The KraneShares European Carbon Allowance ETF (NYSE: KEUA) provides direct exposure to the European Union Allowances that trade under the EU’s Emissions Trading Scheme. This ETF follows the price performance of European Union ETS carbon credits, providing direct exposure to the growth of carbon markets.

 

 

The KraneShares Global Carbon Transformation ETF (NYSE: KGHG) provides exposure to the EU ETS carbon credits, California’s CCA carbon credits, and the RGGI carbon credits of the northeastern United States.

Current portfolio weighting heavily favors European Union Allowances, however, this ETF does cover all three major compliance markets, providing exposure to the growth of the carbon markets with less risk and, due to its diversification, less volatility than other carbon credit futures ETFs.

 

 

BlackRock US Carbon Transition Readiness ETFs

The BlackRock US Carbon Transition Readiness ETF (NYSE: LCTU) comprises mid-to-large-cap US companies prepared to benefit from the transition to a low-carbon economy. The fund has more than 300 holdings in its portfolio. This ETF isn’t exactly about direct exposure to the carbon markets, but it will benefit from decarbonization while providing more long-term stability due to its diversified holdings.

 

 

The BlackRock World ex US Carbon Transition Readiness ETF (NYSE: LCTD) is comprised of mid-to-large-cap global companies that are considered to be positioned to benefit from the transition to a low-carbon economy. Once again, this well-diversified ETF doesn’t provide so much direct exposure to the growth of carbon markets, but will provide more long-term stability.

 

 

SPDR MSCI ACWI Low Carbon Target ETF

The SPDR MSCI ACWI Low Carbon Target ETF (NYSE: LOWC) tracks the index of the same name, and its holdings spread over 1,000 low-carbon companies globally. Holdings are heavily weighted towards US stocks and include the likes of Apple (NASDAQ: AAPL), Microsoft (NASDAQ: MSFT), and Amazon (NASDAQ: AMZN).

It’s low-risk thanks to its broad diversification, but it provides less direct exposure to the growth of carbon markets. Nonetheless, like other similar funds, this ETF is clearly a play on decarbonization.

 

 

iShares Global Green Bond ETF

The iShares Global Green Bond ETF (NASDAQ: BGRN) follows an index made up of investment-grade green bonds that have been issued to fund environmental projects around the world. It comprises more than 600 holdings primarily in sovereign and other government-related debt. For fixed income portfolios, BGRN could be the ideal fit. 

 

 

VanEck Vectors Green Bond ETF

VanEck Vectors Green Bond ETF (NYSE: GRNB) tracks the S&P Green Bond US Dollar Select Index, made up of US dollar-denominated bonds issued to fund environmental projects around the world. The fund owns around 300 holdings—mostly sovereign and other government-related debt. This is a conservative play on decarbonization; GRNB can add green exposure to fixed income portfolios.

 

 

Hanetf ETC Securities PLC Spark (aka SparkChange)

For those looking for direct exposure to the European carbon market, SparkChange could be a great target. The SparkChange Physical Carbon EUA ETC (LSE: CO2) provides direct exposure to the European Union Allowances. Unlike most of the other exchange-traded products that are also tied to EUAs, CO2.L directly purchases and holds EUAs instead of the futures. This means that CO2.L theoretically tracks the price performance of EUAs even more closely than its peers. I really like this.

 

 

Ninepoint Carbon Credit ETF 

For Canadian investors looking for something with a balanced exposure to the compliance carbon markets instead of just the EU’s Emissions Trading System, Ninepoint Carbon Credit ETF (NEO: CBON) is a good choice. The fund positions itself in the major carbon allowance futures globally, namely, the European Union Allowance, the California Carbon Allowance, and the Regional Greenhouse Gas Initiative. Good cross exposure here.

 

 

Horizons Carbon Credits ETF

Horizon’s Carbon Credits ETF (TSX: CARB) is the first carbon-credit-related investment product to list on the Canadian markets. A passive fund based on the Horizons Carbon Credits Rolling Futures Index, CARB.TO is made up solely of European Carbon Allowance (EUA) futures. The underlying index is a proprietary index provided by the fund manager and is designed to reflect the returns generated over time through exposure to investments in European carbon credit futures contracts.

 

 

Is a Buying Window Opening Now?

From a conservative investment standpoint, a period of rising interest rates could see prices of fixed income portfolios decline relative to the market—meaning now would not be a bad time to start assessing investment targets such as green bond funds or ETFs that focus on the long-term.

Overall, a buy and hold strategy in the carbon markets looks like a good bet, as demand for carbon credits rises against the backdrop of expanding regulatory and voluntary caps on carbon production and rising energy demand.

Since being involved in putting the very first Globe Conference on Business and the Environment on CD ROM (that’s a long time ago), I’ve held that green is profitable. To be clear, I am not nor have I ever been an environmental activist or cheerleader, and have always regarded decarbonization as an investment opportunity. That viewpoint has not changed. There’s a lot of money to be made from decarbonation, and now may be the ideal time to get involved.


Blake Desaulniers, Contributor
for Investors News Service

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DISCLAIMER: Investing in any securities is highly speculative. Please be sure to always do your own due diligence before making any investment decisions. Read our full disclaimer here.


Published April 2022


Sources:

[1] https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge

[2] https://www.carbonstreaming.com

[3] https://ipathetn.barclays/details.app;instrumentId=369782

[4] https://kraneshares.com

[5] https://ihsmarkit.com/products/global-carbon-index.html

Blake Desaulniers
For more than 25 years, Blake Desaulniers has worked for some of North America’s most prominent investment newsletters and advisory services. His specialty is identifying important trends and technologies before they become common knowledge, and pinpointing the companies best positioned to capitalize on them. Blake has provided direction and editorial for Equity Magazine, BC Business, Financial World, Prospector News, and is the current Editor in Chief at Northern Equity Research.
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