Russia’s invasion of Ukraine has sent markets spiraling even further and has impacted all sectors, both in the U.S. and abroad. In the European Union, natural gas prices have risen, and while carbon allowances initially rallied on the news, they soon fell. With geopolitical risk suddenly a top consideration for advisors, seeking diversification of exposure to global carbon markets over concentrated exposure could be an answer for investors concerned about volatility and uncertainty.
The Nord Stream 2 pipeline production has been halted by Germany in response to Russia’s invasion of Ukraine and will continue to remain at a standstill until Russian aggression ceases. Natural gas prices rose and are now up 30%, which generally means that carbon allowance prices also increase because greater use of natural gas equates to more carbon allowances being needed. While this was the case temporarily, ultimately the day saw EUA allowances sliding.
Luke Oliver, managing director, head of strategy for KraneShares, discussed reasons for this potential downturn in a communication to ETF Trends, and the speculation around what prompted the sell-off comes down to two different potential reasons.
“Some see huge margin calls across the broader global equity investment landscape creating liquidity needs that are tugging on all risk assets – the old chestnut of ‘risk off’ mode. The other view is that the yesterdays gains were short sighted in that while high energy prices means more carbon allowance demand, the overall economic impact could push Europe into recession which more than negates the ‘benefit’,” Oliver explained.
Oliver anticipates that carbon markets could experience volatility for the near future while investors and markets process the events and implications going forward. Not everyone is ignoring this opportunity though, with some buyers swooping in to take advantage of EUA valuations.
“It’s worth noting that compliance buyers showed up to scoop allowances at the lows,” Oliver said.
For investors who are concerned about enhancing geopolitical risk by only investing in a targeted carbon market, the KraneShares Global Carbon ETF (KRBN) offers a first-of-its-kind take on carbon credits trading globally and is in a position to capture the rise in carbon allowance prices as emissions limits become more stringent.
KRBN tracks the IHS Markit Global Carbon Index, which follows the most liquid carbon credit futures contracts in the world.
This includes contracts from the European Union Allowances (EUA), California Carbon Allowances (CCA), Regional Greenhouse Gas Initiative (RGGI), and the United Kingdom Allowances (UKA) markets. North American pricing data is supplied by IHS Markit’s OPIS service, while European prices are supplied by ICE Futures Pricing.
KRBN invests in its futures contracts via a Cayman Islands subsidiary, meaning that it can avoid distributing the dreaded K-1 tax form to its shareholders.
KRBN carries an expense ratio of 0.78% and has over $1.76 billion in net assets.
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