Climate and the energy transition remain highly politicized topics in the U.S. Regardless of sentiment , however, the energy transition is well underway globally. Investors wanting to harness the outsized return potential of the energy transition should look to both carbon markets and electrification metals.
The expectation is that renewable energy sources will make up half of the world’s electric supply by 2030. By 2050, that number jumps to 70%. Solar alone will provide more electricity than all of the current U.S. power grid, according to the International Energy Agency. Under existing policy guidance, renewable energy sources will account for 80% of all new power generation capacity through 2030.
Image source: IEA
It’s a monumental shift and requires a great deal of investment to reach. It also presents a significant opportunity for investors looking to get ahead of the transition.
“This is not an equity story. It’s not about trying to pick winners and losers in the market. This is a picks-and-shovels story,” explained Luke Oliver, managing director, head of climate investments at KraneShares, and Megan Gummer, investment strategist at KraneShares.
The Roles of Carbon Markets and Electrification Metals
Regulated cap-and-trade carbon markets work by creating a ceiling on emissions for market participants. Any overages require participants to buy carbon allowances, equal to 1 metric tonne of carbon dioxide, for emissions exceeded.
Although the different markets operate with different mechanisms and cover different industries, all tighten over time to reach net-zero carbon emissions goals by 2050. This drives up the cost on emissions, making it increasingly cost-prohibitive to pollute for participants.
The carbon markets then take the money made and use it to invest in a range of climate initiatives. This includes investing in renewable energy development, carbon capture technologies, and more. They provide a major source of capital for the renewable energy transition currently underway. In 2023, emissions trading systems (ETS) and carbon taxes generated over $100 billion in revenue for the first time, reported the World Bank.
Beyond just the capital necessary to drive the energy transition are the raw materials needed for renewable energies, electric vehicles, and more. On the most conservative end of estimates, the IEA forecasts for doubling mineral demand in the next two decades. A more aggressive timeline to actually meet 2050 net-zero goals results in a quadrupling of demand.
Image source: IEA
Harness the Energy Transition With KRBN and KMET
Investors find themselves with an opportunity to capture and benefit from the energy transition on two different fronts. By going long carbon markets, they stand to benefit from rising carbon allowance prices and the increasingly central role these markets play in capital creation. On the other end, investing in the raw materials necessary for the energy transition now allows investors to get ahead of and benefit from rapidly increasing demand in the coming years.
The KraneShares Global Carbon ETF (KRBN) seeks to offer exposure to some of the largest cap-and-trade carbon markets globally. The fund was the first of its kind to offer an investment take on carbon allowance trading. KRBN tracks the S&P Global Carbon Credit Index, which follows the world’s most liquid carbon allowance futures contracts.
This includes contracts from the European Union Allowances (EUA) and California Carbon Allowances (CCA). It also includes the Regional Greenhouse Gas Initiative (RGGI) markets and the United Kingdom Allowances (UKA). KRBN carries a management fee of 0.79%.
Meanwhile, the KraneShares Electrification Metals Strategy ETF (KMET) offers targeted exposure to the metals necessary for electrification, such as copper, lithium, and more. The strategy harnesses the growing metal demand from the clean energy transition via the futures market.
The fund seeks to track the Bloomberg Electrification Metals Index. KMET carries futures contracts on copper, nickel, zinc, aluminum, cobalt, and lithium. These metals are all core components for batteries, electric vehicles, and the renewable energy infrastructure needed to meet 2050 net-zero goals.
KMET’s largest metals futures allocations currently include copper at 31.84%, nickel at 20.04%, and zinc at 15.15%, as of 5/28/24. The fund has an expense ratio of 0.80%.
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