Carbon Fund Advisors Inc has announced the launch of the Carbon Strategy ETF (NYSE: KARB), an actively managed thematic ETF that is designed to provide investors with exposure to the global compliance carbon markets, which have grown from EUR186 billion (USD220 billion) in 2018 to EUR760 billion (USD899 billion) in 2021 according to Refinitiv.
“There is a growing global push to regulate and reduce greenhouse gas emissions in an effort to combat climate change, and emissions trading systems can be an effective tool for governments across the globe to achieve their climate goals,” says Tim Collins, a founder and President of Carbon Fund Advisors.
The firm writes that compliance carbon markets are comprised of emissions trading systems (“ETS”) established by regional, national or subnational jurisdictions to put an explicit price on greenhouse gas (“GHG”) emissions. A cap is set on the total annual GHG emissions to be generated by companies in regulated industries. The cap, or permitted emissions, declines annually to achieve the climate goals of the jurisdiction(s). Carbon allowances equal to the emissions cap may then either be freely allocated and/or auctioned to emitting companies by the governing entity. Companies within an ETS may buy or sell carbon allowances based on need (i.e., a company with lower emissions may choose to sell allocated carbon allowances to an entity with higher emissions). Emitters with an insufficient amount of allowances to offset their emissions at the end of the reporting period incur penalties.
“Most investors do not have access to directly buy and sell carbon allowances in these systems, which is limited to those registered in an ETS,” says Collins. “While active futures markets can provide investors with exposure to certain compliance carbon markets, investing directly in carbon allowance futures contracts can be challenging because of the difficulties associated with gaining access to derivative markets. The Carbon Strategy ETF is a potential solution for that issue because it opens the door to invest in a portfolio of carbon allowance futures at a time when global carbon prices are forecast to rise as the world aims to achieve the goals of the Paris Agreement.”
The fund uses the Carbon Streaming BITA Compliance Index (the “Index”) as a reference index, which tracks the performance of the compliance carbon markets through an allocation into a series of carbon allowance futures contracts. The Carbon Strategy ETF will initially hold futures contracts for carbon allowances in some of the most heavily traded carbon markets, located in Europe and North America, including European Union Allowances (EUA), California Carbon Allowances (CCA), and the Regional Greenhouse Gas Initiative (RGGI) CO2 Allowances.
