The long-term outlook for European carbon looks strong as reforms begin to take effect.
The European Commission is beginning to implement its supply tightening “Fit for 55” reforms, strengthening the long-term outlook for the space. However, the short term is expected to see some impact from macroeconomic concerns, according to KraneShares, creating an attractive buying opportunity for European Union Allowances (EUA).
2023 compliance demand may be impacted by declines in power demand across Europe as well as reduced industrial output, according to KraneShares. This means the current market level presents an opportunity to buy EUAs while below the levels forecast for 2025 onward.
With long-term tailwinds on the horizon, European carbon allowances are a compelling asset class to consider. Advisors and investors looking to diversify their commodity exposures would do well to consider the KraneShares European Carbon Allowance ETF (KEUA).
“Advisors are often looking to broaden client portfolios beyond equities and fixed income. With severe US weather making headlines in August, ETFs providing exposure to climate change fighting strategies could be the answer,” Todd Rosenbluth, head of research at VettaFi, said.
Under the Hood of KEUA
KEUA is an actively managed fund offering targeted exposure to the EU cap-and-trade carbon allowance program. The fund is benchmarked to the IHS Markit Carbon EUA Index, which tracks the most traded EUA futures contracts.
KEUA has $23 million in assets under management and an expense ratio of 79 basis points.
The EU carbon market covers over 12,000 participants and a variety of industries. Companies within certain industries such as power, agriculture, industrial, and aviation are mandated to participate.
Recent legislation in the EU creates greater supply reductions in the long term and more aggressive tightening of the market.
The Fit for 55 package was proposed in 2021. The package is designed to reduce carbon emissions by 55% or more by 2030 compared to 1990 levels. This means reducing carbon allowances 4.2% per year compared to the previous 2.2%, tightening price pressures each year for participants.
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