How to Invest in Carbon Credits with ETFs

Written by

Justin Kuepper

Published on

Jan 13, 2022

Last updated

Jan 13, 2022

Greenhouse gas emissions are a part of everyday life. For example, many families cannot afford a new electric vehicle, and cement companies cannot efficiently heat kilns to 1,400C with electricity. Until renewable energy becomes viable in these use cases, governments have turned to carbon credits as a way to offset these emissions.

Let's look at what carbon credits are, how they work, and how you can use and invest in them.

What Are Carbon Credits?

The idea of carbon credits came about in 1997 with the Kyoto Protocol. Under the agreement, industrialized countries would operate their own emissions trading market. If a country emitted less than its target, it could sell the surplus to countries that did not achieve their goals through an Emissions Reduction Purchase Agreement (ERPA).

Countries that went over their targets could buy carbon credits—or permits allowing companies to emit a certain amount of carbon dioxide or greenhouse gases. In particular, each credit permits the emission of one tonne of carbon dioxide or its equivalent. In other words, it offsets the equivalent of about 2,400 miles driven in a typical vehicle.

There are two types of carbon markets:

  • Voluntary markets are where companies achieve net-zero goals by offsetting their emissions with carbon credits. These carbon credits come from agricultural, forestry, or other projects that reduce, avoid, destroy, or capture emsisions.
  • Compliant markets use cap-and-trade schemes whereby companies in certain industries must stay under a set emissions cap (or maximum). If they exceed the maximum, they must purchase approved carbon credits from a regulated market. If they use less than they need, they can sell those credits into the market.

While the U.S. hasn't widely bought into these schemes for political reasons, 11 states have implemented market-based approaches to reducing greenhouse gases. Ten of these states banded together through a program known as the Regional Greenhouse Gas Initiative (RGGI), while California adopted its own cap-and-trade program in 2013.

Investing in Carbon Credit ETFs

Carbon credit ETFs are funds that invest in regulated carbon trading schemes. Often, they purchase futures contracts on carbon credits that increase in value as the price of carbon credits rises. In some ways, it's a bet on the growth of the carbon trading market. In other ways, you only make money when carbon offsets become more expensive.

There are four carbon credit ETFs:

KraneShares Global Carbon Strategy ETF (KRBN)

The KraneShares Global Carbon Strategy ETF (KRBN) provides broad exposure to several cap-and-trade carbon schemes, including European Union Allowance (EUA), California Carbon Allowances (CCA), Regional Greenhouse Gas Initiative (RGGI) allowances, and UK Allowances (UKA) through 2022 and 2023 vintage futures contracts.

Fund Details

  • Net Assets: $1,633,465,092
  • Expense Ratio: 0.78%

KraneShares European Carbon Allowance Strategy ETF (KEUA)

The KraneShares European Carbon Allowance Strategy ETF (KEUA) provides targeted exposure to European Union Allowances (EUAs) that cover 27 EU member states along with Iceland, Liechtenstein, and Norway. The fund gains exposure through European Union Allowance 2022 futures contracts.

Fund Details

  • Net Assets: $16,207,178
  • Expense Ratio: 0.79%

KraneShares California Carbon Allowance Strategy ETF (KCCA)

The KraneShares California Carbon Allowance Strategy ETF (KCCA) provides targeted exposure to California's cap-and-trade program. In particular, the fund invests in California Carbon Allowance futures contracts. Each contract physically delivers 1,000 California Carbon Allowances upon the contract's expiration.

Fund Details

  • Net Assets: $117,618,459
  • Expense Ratio: 0.79%

iPath Series B Carbon ETN (GRN)

The iPath Series B Carbon ETN (GRN) provides exposure to European Union Allowances (EUAs) and Certified Emissions Reductions (CERs) through futures contracts. CERs were issued by the Clean Development Mechanism Executive Board for emissions reductions achieved by CDM projects and verified by DOEs under the Kyoto Protocol.

Fund Details

  • Net Assets: $122,130,000
  • Expense Ratio: 0.75%

Should You Invest in Carbon Credits?

Carbon credits have become a popular way to help governments and companies reach emissions targets. However, the collapse of Certified Emissions Reductions (CERs) following the Eurozone debt crisis from $20 to under $5 underscored the risks. The good news is that new schemes seem to have more stable pricing and markets in place.

At the same time, investors looking to support the environment may have better options than investing in carbon credits. Rather than increasing the cost of offsets through investment, investors can have a more direct impact through impact investments that fund solar projects, geothermal power, or other technologies that directly reduce emissions.

Finally, carbon credits have come under some scrutiny because they provide an easy way out for large companies to become "net zero." For instance, a company might spend money to offset their emissions rather than actually reducing their emissions using renewable energy. The result is a shifting of responsibility rather than lasting change.

The Bottom Line

Carbon credits are tradable certifications representing one tonne of carbon dioxide or its equivalent. Under voluntary and compliance schemes, companies use carbon credits to offset their emissions or reach net-zero targets. Carbon credit ETFs enable investors to participate in these markets, although there may be better ways to make an impact.