It took just one day for the newly sworn in President of the US, Donald Trump, to withdraw from the Paris agreement on climate change.
The move reinforces the Administration’s support for fossil fuels and makes clear that the leader of the world’s largest economy will not prioritise reducing the nation’s carbon emissions which are the second highest by capita the world.
However, there are those that do not see Trump’s succession as an environmental disaster and instead consider it an opportunity to manage carbon through allowance trading.
Carbon allowance trading, also known as carbon trading or emissions trading, is a market-based mechanism designed to reduce greenhouse gas (GHG) emissions by assigning a cost to pollution. It operates within a cap-and-trade system, where governments or regulatory bodies set a cap on the total amount of emissions that certain industries or entities can produce. Entities must hold carbon allowances to emit GHGs, and these allowances can be traded in a market.
Krane Funds Advisors, (KraneShares), an asset management firm known for its global ETFs, believes carbon markets are “likely to remain resilient -and may even strengthen – in response to a potential shift in federal leadership.”
KraneShares Head of Climate Investments, Luke Oliver, says: “[Carbon allowance trading] is a market mechanism and when you think about how it works, it is pretty genius. You create a market where the rising price of carbon doesn’t suddenly kill an industry, instead it gives them a runway to gradually shift emissions downwards. You give them a financial incentive, you can monetise it and hedge your energy transition, and that’s what makes it so attractive. Plus, it creates massive revenues for the government.”
KraneShares launched the first, largest, and most liquid carbon ETF on the New York Stock Exchange in 2020 in partnership with Climate Finance Partners and has recently announced the listing of the KraneShares Global Carbon Strategy ETC (KRBN) on the London Stock Exchange.
Oliver says: “We have built a set of strategies that are aligned to the inevitable, massive thematic shift in the global economy to a lower carbon. This is not about ESG, although it does fit with a sustainable investment strategy, this is an investment. We’re not asking you to lose money, donate your money to do something good. This is a good investment.”
Oliver continues: “We built these carbon products in the US, but we always saw Europe as a developed capital market for raising ETF assets as well as being further ahead in understanding carbon price and climate action. We went ahead and launched in mainland Europe, Germany and Italy initially, and then launched in London as soon as we could. We wanted to get to London, because we see that as the fastest growing, biggest ETF market in the region.”
Oliver argues that carbon trading allows investors to maintain holdings in companies with relatively high GHG emission and use the ETF to offset their exposure.
“What’s emerging in the US – and it’s interesting to see if this will be powerful for Europeans who may not need as much of a justification to buy something that’s climate adjacent – is investors say they don’t want to sell high carbon equities, because then they get a tracking error to the portfolio. How do I reconcile that – by going long our global carbon strategy to neutralise it.”
In 2023, global carbon allowance trading market value reached a record USD949 billion marking a 2 per cent increase from the previous year, and by 2028 is estimated to reach USD1.6 trillion.
