The three ETFs tied most closely to international carbon credit marketplaces have recovered after Russia’s invasion of Ukraine sent their total returns tumbling by almost 50 percentage points in early March.
The iPath Series B Carbon ETN (GRN) and the KraneShares European Carbon Allowance Strategy ETF (KEUA) are producing year-to-date returns of 10.4% and 5.5%, respectively, as of close Thursday, while the $1.3 billion KraneShares Global Carbon Strategy ETF (KRBN) is just below neutral.
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The KraneShares California Carbon Allowance Strategy ETF (KCCA), which tracks the combined credit markets in California and Quebec, is less prone to moving in step with its European counterparts due to specific political considerations in the U.S. and Canada.
GRN and KEUA primarily track prices of the European Union’s carbon trading system. The trading platform is part of the bloc’s plans to reduce its emissions by 55% by the end of the decade and become carbon-neutral by 2050, and amounts to 90% of the global carbon market.
Prices for credits dived as Russia began its incursion, as European traders feared that the EU banning imports of Russian fossil fuels would send the continent into a recession and ultimately drag down demand for energy to power key industries.
John Wilson, co-CEO and managing partner of Toronto-based alternatives investment firm Ninepoint Partners, said Europe moved to coal shortly after the invasion started to keep power generation up if Russian natural gas would stop flowing west. The higher emissions output of coal means power generators need more credits to maintain their compliance.
“There was just general uncertainty about, ‘Oh my God, are we going to go into a massive recession because of this war,’ and there was all this knee-jerk reaction,” he said. “But all that has happened is people have realized that the world is going to keep going on.”
The market was also calmed by a report in late March from European regulators saying there was no undue influence in the pricing of carbon credits by financial speculators, pushing back on Poland’s claim of speculation driving up credit prices in December 2021.
Wilson, whose firm runs its own carbon allowance ETFs on the Canadian NEO Exchange, remains bullish about the long-term prospects for the market because of both the built-in reductions in new credit issuances meant to phase out emissions entirely, and because Western governments now have a clear security reason to reduce their reliance on Russia.
“If you're Europe, and you're sort of a slave to the dictatorship of Russia that's very aggressive, you might want to push up the price of carbon to help industry transition away from oil and gas just for national security purposes,” he said.