Lending markets

Are you looking for an inflation hedge? Consider carbon markets

Market volatility continues as investors absorb and react to concerns about inflation, the war in Ukraine, rising interest rates and other factors. Advisors and investors have increasingly sought refuge in safe-haven assets, and commodities have seen a spike in inflows not seen in years. When considering commodities as a hedge against inflation, advisors should view carbon markets as a good short- and long-term opportunity.

Carbon markets and carbon quotas have a key role to play in the global transition to net zero emissions. European carbon markets are feeling the immediate effects of the geopolitical conflict between Russia and Ukraine, and KraneShares Managing Director and Chief Strategy Officer Luke Oliver explained the link between European carbon markets and oil and gas natural Russians.

“Simply put, as Russian gas supplies further exacerbate natural gas prices, industries, including power generation, will have to burn more coal. More coal means more emissions, which means more carbon demand,” Oliver wrote in a communication to ETF Trends. “Switching to coal or oil from expensive natural gas also increases their prices. ride together.

Russia’s invasion of Ukraine and the lasting impact of a possible permanent abandonment of Russian oil and natural gas for Europe has introduced a great deal of uncertainty into the market, leading to volatility and a technical sell-off. . The liquidation of European Union (EUA) quotas provided investors with the opportunity to access the market at attractive prices.

“In the short term, there is potentially an opportunity to enter the carbon markets after a technical sell-off and uncertainty around fundamentals. As the European Union asserted its market-tightening measures, we saw confidence rising to return,” explained Oliver. “Long-term carbon is expected to outperform oil, coal and gas because it essentially ushers in the demise of these fossil fuels over time.”

Seizing the price opportunity for European carbon quotas

the KraneShares European Carbon Allowance ETF (KUA) offers targeted exposure to the EU carbon allowance market and is actively managed.

The fund’s benchmark is the IHS Markit Carbon EUA Index, an index that tracks the most traded EUA futures contracts, which come from the oldest and most liquid market in carbon allowances. The market currently offers coverage for around 40% of all EU issues, including 27 Member States and Norway, Iceland and Liechtenstein. The annual cap reduction was recently increased from 2.2% to 4.2% to meet long-term carbon emissions targets.

As the fund is actively managed, it may invest in carbon credit futures with different expiry dates or weight the futures contracts differently than the index. The fund potentially trades CTFC regulated futures and swaps above the CFTC 4.5 limit and is therefore considered a “commodity pool”.

KEUA has an expense ratio of 0.79%.

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