Total assets under management by the newest carbon market ETF have more than tripled since the start of the year, in a further sign of investors rushing to gain exposure in this burgeoning asset class.

The KFA Global Carbon ETF (ticker: KRBN), managed by New York-headquartered Krane Funds Advisors, has seen the value of its holdings rise to around $60 million this week, up from just over $17 mln at the start of 2021.

The vehicle, which tracks carbon allowances in the largest and most liquid cap-and-trade schemes worldwide, launched last July with roughly $3 mln under management.

Interest is accelerating as investors clamour for plays in the ballooning ESG space, and in particular carbon allowances and offsets.

Most of the buying of KRBN to date has come from US institutional clients and pension funds, KFA told Bloomberg.

Speculators are also amassing large active positions in the EU and California carbon markets, betting that allowance prices will surge to new records in the months and years to come as governments ramp up their climate ambition.

In the EU ETS alone, trading data shows some 250 investment funds now report positions in the market – compared to fewer than 100 three years ago – while the number of commercial undertakings participating has increased by 50% over that period.

In addition, investors recognise that cash-depleted governments, fresh from battling the coronavirus pandemic with unprecedented funding and stimulus levels, are seeking new sources of revenue, and forcing emitters to pay more to pollute could rank near the top of that list.

What’s more, carbon has been labelled “a key commodity to watch” over the next decade as investors seek to ‘green’ their portfolios, recognising that fossil fuels are becoming an increasingly unviable place to one’s money.

Allowance prices in the EU ETS hit a fresh all-time high near €44 on Thursday, with analysts at ClearBlue Markets this week forecasting that they could climb to €70-90 by 2030 as lawmakers reform the market and further tighten supply.

In California, US investment bank analysts on Friday predicted CCA prices could rise to $30 in 2025 and to $40 in 2030 – up from current levels around $18.50 – as a supply deficit in that market worsens over the decade.

In the lesser known and more illiquid carbon offsets market, new offerings including a handful of standardised, exchange-traded contracts have roughly doubled in value since the end of last year.

Proponents of carbon maturing to become a more established asset class also point to China’s new national market, which is finally set to kick off this June following years of delays, and to the CORSIA aviation offset scheme operated by the UN’s ICAO, as potentially big drivers of additional investor demand.

KRBN has not shown up on retail investors’ radar yet, KFA said, but that may change as carbon markets gain more attention, for example from high-profile cheerleaders including FinTwit grandees with millions of followers, and as President Joe Biden makes climate change a top priority under his administration.

That said, traders note that EU carbon seems to be catching more attention from funds and retail investors, highlighting posts making the case to go long EUAs appearing on chat discussion websites including Reddit – home of the WallStreetBets chat group that recently helped cause a squeeze in a handful of heavily-shorted US stocks.

While some long-time participants fear that the rapidly increasing interest in carbon markets could fuel an unsustainable price bubble that could throttle many of the compliance players that are obligated to partake and to buy permits, while also harming consumers and other businesses in the process, others welcome it, noting that allowance values in most schemes are nowhere near the levels that experts say are required to spur real abatement and technological change.

KRBN is listed on the NYSE and benchmarked to the IHS Markit Global Carbon Index, which follows allowance prices in the EU ETS and North America’s RGGI and WCI markets.

The ETF, the holdings of which are currently divided between EUAs (70.7%), CCAs (19.7%), and RGGI allowances (9.5%), has seen its net asset value rise from $19.70 at launch to $28.63 currently – growth of more than 45% in less than eight months.

By Mike Szabo – mike@carbon-pulse.com