Carbon ETFs have strong inflows this year despite recent crash

The price of carbon permits in Europe has plummeted amid the Russian-Ukraine escalating crisis, lowering the cost of emitting carbon for the EU’s most polluting companies. EUA Futures trading on ICE exchange fell to €68 per ton of CO2 on Wednesday, a few weeks after reaching a high of €97.

The carbon price usually moves with energy prices, but it has decoupled because of the Russian-Ukraine war. Alessandro Vitelli, an independent report in energy and carbon markets, said traders might have sold their permits to raise funds for natural gas positions. He also speculated Russian investors could be pulling their money out to avoid sanctions.

The EU ETS is a part of the EU's policy to fight climate change and its key tool for reducing greenhouse gas emissions cost-effectively. Companies are allowed to emit a single EU-wide cap on certain greenhouse gases. Within that limit, companies receive or buy allowances (EUA) that they can trade with each other according to their needs. Each allowance is equivalent to one tonne of carbon dioxide (CO2), the most common greenhouse gas.

How to invest in Carbon ETFs in North America?

The dip in the price of carbon allowance could represent a buying opportunity for investors betting on the long-term outlook. Carbon Exchange-traded funds represent an easy and simple route to gain exposure to carbon permits. Domiciled in North America, KraneShares Global Carbon Strategy ETF (KRBN) invests in 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) futures. Meanwhile, the KraneShares European Carbon Allowance ETF (KEUA) focuses solely on EUAs, and the KraneShares California Carbon Allowance Strategy ETF (KCCA) on CCAs. KRBN, KEUA and KCCA have an expense ratio of 0.78%, 0.79%, and 0.79% respectively and trade primarily on the New York Stock Exchange.

Meanwhile, Canadian investors can gain access through the recently launched Carbon Credit ETFs, the Horizons Carbon Credits ETF (CARB) and Ninepoint Carbon Credit ETF (CBON) — the first Carbon Credit ETFs in the Canadian market.

Overall, investors added over $180 million this year into America-domiciled Carbon ETFs.

How to invest in Carbon ETFs in Europe

European investors can gain access to the carbon permits market through SparkChange Physical Carbon EUA ETC (CO2) and WisdomTree Carbon (CARB). CARB provides exposure in EUA Futures. It has a total expense ratio of 0.35% and trades on multiple European exchanges, including the London Stock Exchange (CARB, USD; CARP, GBx), the Borsa Italiana (CARB, EUR), and the Deutsche Boerse (WCO2, EUR). On the other hand, the SparkChange CO2 offers physical EUAs exposure instead of futures. Each SparkChange CO2 is physically backed by one EUA. The EUAs held within the ETC structure cannot be used by polluters, ensuring direct and positive environmental impact. The ETC has a total expense ratio of 0.89% and trades on the London Stock Exchange (CO2 LN, EUR; CO2P LN, GBP; CO2U LN, USD).  This year, investors added $110 million into these two funds.

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