Hedging your portfolio against carbon price risk

12 exchange traded products (ETPs) with exposure to carbon allowances

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One of the most frequent questions I get from subscribers to Carbon Risk is how to allocate a proportion of your pension (or tax-free investment wrapper) to compliance carbon markets such as the EU ETS.

Listed below are the 12 exchange traded products (ETPs) I’ve been able to identify. There may be more that I haven’t come across, and if you do know more, please let me know in the comments. Before you consider making an investment in any of the ETPs here’s just some of the things you need to think about:

> As you’ll see, some of the products can only be accessed in specific parts of the world. Although the geographical coverage is improving, most of the funds listed below are targeted at investors based in the US, Canada, the EU, and the UK.

> Assets under management (AUM) is an important factor. The higher the AUM the lower the costs that are typically borne by the investor, while large fund sizes tend to have longevity, reducing the risk that the fund is closed. Note that both the Carbon Strategy ETF (KARB) and the Global Carbon ETF Synthetic (GCO2) closed due to poor growth in AUM and low levels of liquidity.

> Some of the funds were launched as far back as 2019 or 2020. It means they have experienced both the bull and the bear market in carbon prices, and are still going today, often with significant assets under management (AUM). It’s no guarantee that the fund won’t close, but it’s less likely, especially if it’s part of a strong issuer. Other funds launched towards the top of the market and have struggled to build AUM.

> The ETPs use very different financial instruments to track the price of EU carbon allowances - futures, physical, swaps and so on - which in some cases introduce other risks, e.g. counterparty risk, tracking error, etc. There may also be upfront and annual management fees that will eat into the potential returns. Investors should also be aware of the bid-offer spread if they think they are likely to trade the ETP.

> EU targeted funds are typically marked as being UCITS eligible and are designed to offer investors a high level of protection. They must adhere to strict rules regarding the diversification of their portfolio, liquidity of assets, and the use of leverage.

> Be aware of what you are investing in. Of those twelve ETPs identified, only two invest in a basket of carbon markets, seven invest in the EU ETS only, while two are allocated solely to the California market. There are no ETPs that invest solely in the UK ETS or the Regional Greenhouse Gas Initiative (RGGI). The last ETP in the list only allocates a small proportion to carbon.

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Multi-carbon markets

1) KraneShares Global Carbon Allowance ETF (KRBN)¹

Launched in July 2020, the KraneShares KFA Global Carbon ETF (KRBN) was the first carbon futures fund to track the performance of carbon allowances across several emissions trading schemes. Benchmarked against the IHS Markit Global Carbon Index, KRBN is exposed to EU ETS (57.8%), Californian carbon market (32.6%), RGGI (5.4%), and the UK ETS (4.4%). The fund is rebalanced every November.

Asset structure (futures), exchanges (NYMEX, Borsa Italiana, Deutsche Börse Xetra, and soon to be launched on the LSE), annual management fee (0.85%), UCITS eligible (No), AUM $275 million

2) Ninepoint Carbon Credit ETF (CBON)²

The fund holds a broadly equal weighting across four carbon allowance markets: the EU ETS, California, RGGI, and the UK ETS. CBON floated on the Canadian NEO exchange in early February 2022.

Asset structure (futures), exchanges (NEO), annual management fee (0.55% - 1.74%), UCITS eligible (No), AUM $0.7 million

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European emissions trading scheme (EU ETS)

3) SparkChange Physical Carbon EUA ETC (CO2)³

The SparkChange Physical Carbon EUA ETC (CO2) launched in early November 2021. The fund enables investors to gain direct exposure to the physical EU carbon allowance via a physical EUA backed note.

Asset structure (ETC backed by physical EUAs), exchanges (LSE, Borsa Italiana, Deutsche Börse Xetra, Mexican Bolsa), annual fees (0.89%), UCITS eligible (Yes), AUM $152 million

4) Wisdom Tree Carbon ETC (CARB/CARP/WCO2)⁴

The Wisdom Tree Carbon ETC fund differs from those listed above in that it is an exchange traded commodity (ETC) fund backed by swaps. The fund aims to track the Solactive Carbon Emission Allowances Rolling Futures Total Return Index. The index measures total return performance based on the futures price performance, the roll return, and the return of cash collateral such as Euro Short-term Rate (ESTR).

Asset structure (swaps), exchanges (LSE, Borsa Italiana, Deutsche Börse Xetra, Euronext, Mexican Bolsa), annual management fee (0.35%), UCITS eligible (Yes), AUM $90 million

5) Xtrackers Physical Carbon EUA ETC Security (XEAL)⁵

The ETP is based on the spot price for EUAs, as determined by the European Energy Exchange (EEX) with each note physically secured by physical EUAs held by the issuer. The product was launched in November 2023, and is the second ETP to target physical EUAs following the SparkChange Physical Carbon EUA ETC.

Asset structure (swaps), exchange (Deutsche Börse Xetra), annual management fee (0.74%), UCITS eligible (Yes), AUM $28 million

6) iPath Series B Carbon ETN (GRN)⁶

Launched in September 2019, the iPathA Series B Carbon ETN tracks the Barclays Global Carbon II TR USD Index.

Asset structure (swaps), exchange (NYMEX), annual management fee (0.75%), UCITS eligible (No), AUM $21 million

7) KraneShares European Carbon Allowance ETF (KEUA)⁷

KraneShares launched an EU ETS specific ETF in May 2021 under the symbol KEUA. The KEUA fund was the first ETF to only invest in the EU ETS and is benchmarked to the S&P Carbon Credit EUA Index.

Asset structure (futures), exchanges (NYMEX), annual management fee (0.82%), UCITS eligible (No), AUM $9 million

8) CICC Carbon Futures ETF (3060)⁸

The CICC Carbon Futures ETF launched in spring 2021 and seeks to track the daily performance of the ICE EUA Carbon Futures Index.

Asset structure (futures), exchanges (HKEX), annual management fee (0.99%), UCITS eligible (No), AUM $8 million

9) Global X Carbon Credits ETF (CARB)⁹

Launched February 2022, the fund aims to track the Solactive Carbon Emission Allowances Rolling Futures Total Return Index. The index measures total return performance based on the futures price performance, the roll return, and the return on cash collateral.

Asset structure (swaps), exchanges (TSX), annual management fee (0.75%), UCITS eligible (No), AUM $2.4 million

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California Cap-And-Trade Program

10) The KraneShares California Carbon Allowance Strategy ETF (KCCA)¹⁰

KCCA provides direct exposure to California’s Cap-And-Trade Program (CTP). The fund was launched on the NYSE in May 2021 and aims to track the S&P Carbon Credit CCA Index.

Asset structure (futures), exchanges (NYMEX), annual management fee (0.87%), UCITS eligible (No), AUM $244 million

11) WisdomTree California Carbon ETC (WCCA / WCCP)¹¹

Launched in April 2023 the fund tracks the Solactive California Carbon Rolling Futures Excess Return Index. The index measures total return performance based on the futures price performance, the roll return, and the return on cash collateral.

Asset structure (swaps), exchanges (LSE, Borsa Italiana, Deutsche Börse Xetra), annual management fee (0.49%), UCITS eligible (Yes), AUM ~$1 million

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Energy transition commodities

12) L&G Energy Transition Commodities UCITS ETF (ETRA / ENTR)¹²

The fund provides exposure to the prices of energy transition metals (nickel, aluminium, copper, lithium, and silver), transition energy commodities (ethanol and natural gas), and carbon (EUAs). Only 5.4% of the fund is allocated to the EU carbon market. The fund was launched in April 2024.

Asset structure (swaps), exchanges (LSE, Borsa Italiana, Deutsche Börse, SIX Swiss Exchange), annual management fee (0.65%), UCITS eligible (Yes), AUM $34 million

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1. https://kraneshares.com/krbn/

2. https://www.ninepoint.com/funds/ninepoint-carbon-credit-etf/?nav-toggle=15486

3. https://hanetf.com/fund/co2-sparkchange-physical-carbon-eua-etc/#tab-id-13

4. https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-carbon

5. https://etf.dws.com/en-gb/etc/XS2595366340-xtrackers-physical-carbon-eua-etc-security/

6. https://ipathetn.cib.barclays/details.app;instrumentId=369782

7. https://kraneshares.com/keua/

8. https://www.hkex.com.hk/Market-Data/Securities-Prices/Exchange-Traded-Products/Exchange-Traded-Products-Quote?sym=3060&sc_lang=en

9. https://www.globalx.ca/product/carb#holdings

10. https://kraneshares.com/kcca/

11. https://www.wisdomtree.eu/en-gb/products/ucits-etfs-unleveraged-etps/commodities/wisdomtree-california-carbon

12. https://fundcentres.lgim.com/en/uk/institutional/fund-centre/ETF/Energy-Transition-Commodities/