KraneShares has expanded its carbon offering with the launch of two new ETFs targeting cap-and-trade carbon allowances in Europe and California.

Cap-and-trade regimes represent a market-based approach to controlling pollution.

The KraneShares European Carbon Allowance ETF (KEUA US) and KraneShares California Carbon Allowance ETF (KCCA US) have been listed on NYSE Arca with expense ratios of 0.79%.

In a typical cap-and-trade regime, a limit (or cap) is set by a regulator, such as a government entity or supranational organization, on the total amount of specific greenhouse gases, such as CO2, that can be emitted by regulated entities, such as manufacturers or energy producers.

The regulator may then issue or sell individual emission allowances to regulated entities. Polluters that want to increase their emissions must buy allowances from others willing to sell them, thereby representing a market-based approach to controlling pollution.

By incrementally scaling back the number of allowances over time, cap-and-trade regimes represent a powerful policy tool for achieving ambitious climate targets, such as those set out by the Paris Agreement.

The KraneShares European Carbon Allowance ETF provides long exposure to commodity futures contracts linked to the value of emission allowances under the European Union Allowances (EUA) cap-and-trade program, the world’s oldest and most liquid carbon allowance market. The EUA program, which covers approximately 40% of the EU’s total emissions, aims to reduce carbon levels to 45% of 1990 levels by 2030 and achieve carbon neutrality by 2050.

The KraneShares California Carbon Allowance ETF, meanwhile, provides long exposure to commodity futures contracts linked to the value of emission allowances under the California Carbon Allowances (CCA) cap-and-trade program which covers approximately 80% of the state’s emissions and, in 2014, expanded to cover Quebec and its emissions. The program plans to reduce carbon levels to 60% of 1990 levels by 2030 and achieve carbon neutrality by 2045.

KEUA and KCCA gain their exposure to the cap-and-trade programs by tracking the IHS Markit Carbon EUA Index and IHS Markit Carbon CCA Index respectively. Each index includes only carbon credit futures maturing within the next two years that have a minimum average monthly trade volume over the previous six months of at least $10 million. Eligible carbon credit futures are weighted by their average monthly trading volume during the three months preceding the annual index rebalance.

The two new funds join the KFA Global Carbon ETF (KRBN US) which combines exposure to three major cap-and-trade programs – the EUA, CCA, and the Regional Greenhouse Gas Initiative (RGGI) – into a single investable product.

Since its inception in July 2020, KRBN has accumulated over $900 million in assets and returned 105.45% (data as of the end of September). The fund is listed on NYSE Arca and comes with an expense ratio of 0.78%.

All three ETFs are sub-advised by environmental finance boutique Climate Finance Partners (CLIFI) which implements the index strategies while actively managing the underlying collateral posted on the funds’ futures positions. The collateral that is not tied up in margin requirement is invested in a mix of government securities and highly rated corporate or other non-government fixed income securities with maturities of up to 12 months.

The ETFs can provide potential portfolio diversification due to the historically low correlation of carbon credits to traditional asset classes.

Luke Oliver, Managing Director and Head of Strategy at KraneShares, said: “Through the phenomenal success of KRBN, we learned that many of our clients also want targeted exposure to the underlying markets. KEUA and KCCA provide access to the component carbon allowance markets at various stages of their growth cycle. With these new ETFs, investors can take a customizable precision-approach to invest in carbon markets.”

Jonathan Krane, CEO of KraneShares, added: “We believe investors are attracted to the carbon allowance investment opportunity because they see its low-correlated growth potential, which can also have a positive impact on the planet. Our Europe and California carbon ETFs join KRBN in expanding KraneShares’ position as a leader in carbon market investment solutions.”

Eron Bloomgarden, co-Founder of Climate Finance Partners: “Economists agree that one of the best policy tools we have to confront the enormous challenge of climate change are emissions trading programs. Our suite of carbon market ETFs helps to catalyze climate-action and complement the progress of cap-and-trade programs. We believe there may also be significant upside potential in the market as the world addresses the climate crisis.”