As summer draws to a close, there has been a flurry of activity in global carbon markets as their constituents grapple with inflation, an energy crisis, legal challenges and more. KraneShares recently did a recap of the activity taking place in every major carbon cap and trade program as well as voluntary carbon markets in their The climate market now Blog.
The EU and UK carbon markets
It was another difficult month for the energy crisis in Europe, with Russia limiting natural gas supply to just 30% via the Nord Stream 1 pipeline before further reducing it to 20% of normal volumes. European Union allowance prices fell on the news, but have since stabilized and are on the rise again. The year-to-date average for the EUAs is €83, and when prices fell they fell to around €76 and have since climbed back to their August 3 average.
In the UK, allowance prices had fallen ahead of the bi-weekly auction on Wednesday, a standard trend for the UK market as participants look to buy less than the current market price.
“In the medium term, the UKA could find endogenous support in the country’s energy mix, which is already heavily gas-based thanks to the country’s reserves in the North Sea. The country also imports a significant volume of LNG to its three terminals, which is why UKA prices are expected to be resilient in the coming weeks and months,” KraneShares explained.
The last week of July saw the highest trading volume for the California market since early March, with over 44 million CCAs traded on ICE Futures. The demand was attributed to the fact that futures prices have fallen below the average settlement price over the past three auctions: a major compliance strategy used by companies is to buy allowances on the secondary market when they fall below the floor price.
The California governor also pushed the California Air Resources Board, a board that reports to the California EPA and whose focus is on clean air, to tighten its 2022 framework plan requirements on air pollution reductions. issues that would create upward pressure on prices for CCAs. Governor Newsom asked the board to emphasize action on home heat pumps, offshore wind, sustainable aviation fuels and carbon capture.
The Regional Greenhouse Gas Initiative has seen price volatility as uncertainty persists around state participation in the program. Following recent declines in RGA prices, there has been a stabilization as participants continued the battle that Pennsylvania is embroiled in at the state level as it attempts to join the RGGA. The most recent development is that the Pennsylvania Commonwealth Court overturned a decision that previously lifted the injunction preventing the state from joining the RGGA, meaning the state will likely not join the RGGA in Q3. for the matter is now before the State Supreme Court.
The voluntary carbon market is creating a framework for itself that would address and ensure integrity throughout the supply of carbon offsets generated by a wide range of projects around the world. The Integrity Council for the Voluntary Carbon Market (IC-VCM) has launched the public consultation portion of its draft Carbon Core Principles, Assessment Framework and Assessment Procedure.
The Carbon Core Principles, with sufficient market support, will create a long-needed benchmark for carbon offsets, ensuring a level of quality that would build trust in markets and ultimately raise the prices of voluntary offsets. Despite the IC-VCM announcement, voluntary market prices continue to be under pressure due to recession risks as well as lingering inflation fears.
“The mid- to long-term outlook for offsets continues to be positive as more integrity initiatives are being developed and more companies and countries commit to achieving net zero. by 2050, with many planning to use the offsets to achieve their goals,” KraneShares wrote.
Investing in Carbon Markets with KraneShares
KraneShares offers a suite of ETFs with a variety of targeted exposures to global capped and traded carbon allowance markets that invest in carbon credit futures. These funds include KraneShares Global Carbon Strategy ETF (KRBN)which invests in carbon allowance futures globally from the EU, California, RGGI and UK markets, as well as more targeted markets KraneShares European Carbon Allowance Strategy ETF (KUA) and the KraneShares California Carbon Allowance Strategy ETF (KCCA).
KraneShares also offers the first U.S. ETF exposure to voluntary carbon offset markets through the KraneShares Global Carbon Offset Strategy ETF (KSET).
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