Carbon Credit Stocks: Should You Invest?
Some people would like to see an immediate transition away from the carbon-intense power generation. However, the reality is that this transition does not happen overnight. As a result, carbon credit programs have been introduced in different parts of the world. Now many are wondering how they can invest in carbon credit stocks.
Companies can earn carbon credits either by offsetting their own carbon emissions through action or by buying credit from other companies that have excess credits. This allows them a way to meet emissions targets without directly reducing how much carbon they emit.
Governments may choose to reduce the supply of carbon credits over time, driving up the price. That has the dual impact of making business more expensive for the worst carbon offenders. While allowing those that sell credits to earn even more from them.
If you want to invest in carbon credits, you won’t be able to find individual carbon credit stocks. Instead, you can invest in exchange-traded funds (ETFs) that contain a few different types of assets, including futures contracts. Let’s look at the best carbon credit ETFs to buy right now:
Carbon Credit Stocks to Invest In
KraneShares Global Carbon ETF (NYSE: KRBN)
The KraneShares Global Carbon ETF (KRBN) is the largest carbon credit ETF; it launched in July 2020 and already has over $1 billion in assets. This fund has a goal of providing a total return that exceeds the IHS Markit Global Carbon Index before taxes and fees.
KRBN invests in futures contracts in the US and Europe. It particularly invests in European Union allowances (EUAs), California Carbon allowances (CCA) and RGGI. The latter is a coalition of 11 states in the northeastern U.S. Here is the breakdown of futures that are a part of KRBN:
- EUA 2022 Future: 56.2%
- CCA 2022 Future: 23.7%
- RGGI 2022 Future: 5.3%
- EUA 2023 Future: 5.1%
- UKA 2022 Future: 5.1%
- CCA 2023 Future: 4.8%
If you are looking to invest in carbon credit stocks, this is one of the best investments to buy. The KraneShares website shows that $10,000 invested in KRBN when it started would have slightly more than doubled in that time. While carbon credit ETFs are still relatively new, doubling your money is always nice to see.
Keep in mind that the fund comes with an expense ratio of 0.78%, which is on the high end for ETFs these days.
KraneShares European Carbon Allowance ETF (NYSE: KEUA)
The KraneShares European Carbon Allowance ETF (KEUA) is an ETF from KraneShares that invests solely in European Union allowances (EUAs). This allows people to invest in just the European Union if they would rather avoid the US market. It uses the IHS Markit Carbon EUA Index, which tracks the most traded EUA futures contracts.
This fund was launched recently, in October 2021. As such, it is still somewhat small with just over $26 million in total assets. Despite the fund’s small size thus far, EU allowances are still a considerable market. KraneShares notes on its website that EUA carbon allowances have traded around $30 billion per month.
Plus, the correlation between carbon allowances and traditional assets is low, which can make EUAs a hedge. However, like KRBN, it comes with a relatively high expense ratio of 0.79%.
KraneShares California Carbon Allowance ETF (NYSE: KCCA)
As you might expect, the KraneShares California Carbon Allowance ETF (KCCA) is another carbon allowance ETF from KransShares. However, this ETF focuses on the California market. This fund was also launched in October 2021 but has already grown to almost $200 million in assets. It uses the IHS Markit Carbon CCA Index, which tracks the most traded CCA futures contracts.
Carbon allowances in California are the result of the CCA cap-and-trade program. This was introduced in 2012 by the California Air Resources Board (CARB). It aims to reduce carbon levels to 60% of 1990 levels by 2030 and achieve carbon neutrality by 2045. Although this fund is considerably larger by total assets than KEUA, total trading volume is much lower, at $1.5 billion per month.
Overall, when thinking about carbon credit stocks, KCCA is already looking like a strong investment opportunity. This is despite the same relatively high expense ratio of 0.79%.
iPath Series B Carbon ETN (NYSE: GRN)
The iPath Series B Carbon ETN (GRN) provides exposure to the Barclays Global Carbon II TR USD Index. Specifically, it provides exposure to the carbon price using the European Union Emission Trading Scheme (EU ETS) and the Kyoto Protocol’s Clean Development Mechanism (CDM). This fund was introduced in September 2019 and already has a market cap of over $120 million.
Keep in mind that this fund is an exchange-traded note (ETN), which is not the same as an ETF. With an ETF, you own the underlying asset, whereas ETNs are unsecured debt securities that act more like bonds.
This ETN has posted nearly identical returns compared to the Barclays index. It returned just over 64% in the past year, while the Barclays index returned about 66%. If you want to invest in it, you will pay similar fees to the ETFs; it comes with a 0.75% expense ratio.
Should You Invest in Carbon Credit Stocks?
As noted, if you want to invest in carbon credits, what you will buy is likely either an ETF or ETN. These assets invest in futures contracts that reflect the price of carbon. In other words, they have a low correlation with the price of stocks. Thus, they can provide some diversification if your portfolio consists primarily of stocks and bonds.
Additionally, carbon credits can be a good investment if you want to put your money into the energy transition. While these are certainly non-traditional assets, prices will likely increase as carbon allowances are phased out, driving prices up. Thus, they could be worth considering for a small piece of your portfolio.
About Bob Haegele
Bob Haegele is a personal finance writer who specializes in investing and planning for retirement. His hefty student loan burden inspired him to pay off his loans, and now he’s helping others get their finances in order. When he’s not writing, he enjoys travel and live music.