Carbon Allowances Could Win the Energy War in Europe

With the coldest months still to come, when energy use will be at its highest, Europe is perched precariously atop its pile of gas storage as it enters winter after a summer of frantically trying to fill reserves. While a warmer-than-average November in Europe may have helped to preserve fuel supplies, the upcoming months and even years may still be difficult and rife with shortages. This may result in higher emissions as fewer clean fuel sources are used to generate electricity in the short term and open up opportunities for carbon allowance investment.

The interconnected nature of Europe’s energy system, which involves nations trading and providing one another with fuel when necessary, has put a strain on all of the member nations. Additionally, it meant using fuel with high carbon emissions, like coal.

Without Russian fossil fuels to rely on and with previously unheard-of shortages in France (outages in many of its nuclear reactors have made the country an energy importer this year) and Norway (low water levels mean that Europe’s largest hydropower producer will face limited energy production), it may become necessary to burn more carbon-emitting sources of fuel in the near future.

Purchasing Carbon Allowances from the EU through KEUA

The European Union Emissions Trading System (EU ETS), a cap-and-trade system that establishes limits on the emissions permitted in specific industries and regions, has a thriving carbon allowances market and currently accounts for about 45% of all EU emissions.

Carbon allowances will be more in demand as emissions rise as a result of a greater reliance on coal, creating favorable price pressures and opportunities for advisors and investors seeking to diversify their portfolios. In a recent survey of financial advisors, VettaFi discovered that the allowance market was the most alluring (42.9%) due to the non-correlated nature of carbon investing as an asset class, followed by the alpha potential (22.4%) and the potential climate and impact investments (18.4%).

The actively managed KraneShares European Carbon Allowance ETF (KEUA) provides focused exposure to the EU carbon allowances market.

The IHS Markit Carbon EUA Index, which tracks the most actively traded EUA futures contracts on the oldest and most liquid carbon allowances market, serves as the benchmark for the fund. Currently, the market provides coverage for 27 EU member states as well as Norway, Iceland, and Liechtenstein, accounting for about 40% of all emissions from the EU.

Due to the active management of the fund, it is possible for it to invest in carbon credit futures with varying maturity dates or to weight futures differently than the index.