Carbon Pricing: Investing in Climate Action

By Oktay Kurbanov, Partner at Climate Finance Partners (CLIFI)

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Carbon pricing has emerged as arguably the most effective policy tool for addressing our climate challenges. After the European Union first introduced its Emission Trading System (ETS) in 2005, carbon pricing mechanisms have expanded to cover about 25% of the world’s emissions today.1 The benefit of an ETS is three-fold: incentivizing companies to reduce their carbon footprint, optimizing capital allocation to the most cost-effective projects and raising revenue to fund innovative clean-tech solutions and social programs.

Among the growing landscape of Environmental, Social & Governance (ESG) and sustainable investment strategies, KraneShares carbon allowance ETFs stand out as a unique approach for both direct climate impact and robust, uncorrelated performance potential. By allocating toward compliance carbon allowances, investors play a pivotal role in supporting liquidity and price discovery in carbon markets as well as the further expansion of global carbon pricing mechanisms. Within an investment portfolio, carbon allocations can serve as a tool for net-zero alignment while improving the overall risk/return profile due to the markets’ embedded structural upside. In this paper, we delve into the full climate impact of carbon markets in greater depth.

  1. The Economist, “How carbon prices are taking over the world,” 10/1/2023.