Ultimately, climate change solutions will need cooperation from all parties, especially in hard-to-abate industries. This includes categories such as natural gas, steel, cement, and chemicals. It is here that the disruptive theme of Carbon Capture Utilization and Storage (CCUS) comes into play.
CCUS is a theme that includes project owners operating in sectors such as energy and utilities (oil, midstream, power generation) and materials (cement, steel, petrochemicals). That also means companies providing equipment and services on the projects.
What is Carbon Capture Utilization and Storage (CCUS)?
CCUS is a mitigation process that separates CO2 from the rest of the emissions given off by industrial sites and power plants that rely on fossil fuels at their source. If possible, it recycles the captured CO2 on-site or stores it for transport.
Below is a visualization of the CCUS value chain outlined by the International Energy Agency (IEA) on its website.
The stored CO2 can then be compressed and delivered via ship, pipeline, or other overland means to be recycled off-site. If not put to use, the CO2 can be pumped into geological formations deep in the earth. This includes naturally formed saline aquifers or the sites that remain after oil or natural gas has been extracted.
Achieving Net Zero Emissions
While this sounds complicated if you are not an environmental engineer, CCUS is expected to play an important role in the energy transition to net zero. Currently, only 500 projects are in development phases around the world. This level of operational capacity is nowhere near what is needed.
However, net zero emissions could be achieved at the global level by 2030 if the existing CO2 capture capacity is utilized and maintains its current rate of expansion, as depicted in the IEA chart below:
Source: IEA.org
ETFs to Play this Theme
While there is currently no pure play on this theme, investors seeking exposure specifically to carbon capture and carbon capture companies have some options.
Carbon Credits
Several ETFs offer exposure to the carbon credit futures market. Carbon credits are “permits” that offset carbon emissions, offering a monetary incentive for companies to reduce their carbon footprint.
KraneShares offers three ETFs that provide exposure to the carbon credit markets: the KraneShares Global Carbon Strategy ETF (KRBN), the KraneShares California Carbon Allowance Strategy ETF (KCCA), and the KraneShares European Carbon Allowance Strategy ETF (KEUA). These three ETFs currently hold a combined $570 million in AUM.
Clean Energy
ETFs investing in clean energy leaders is another way to get this exposure.
The TCW Transform Systems ETF (NETZ) is an actively managed fund that invests in companies that are leaders in or beneficiaries of the paradigm shift required to transition to clean energy. The fund returned more than 20% YTD and has more than $134 million in assets under management.
There are also many clean energy ETFs with more traditional clean energy exposure, including the iShares Clean Energy ETF (ICLN), with more than $2.4 billion in assets, and the First Trust NASDAQ Clean Edge Green Energy Fund (QCLN), with $779 million. Both have traded down this year in the higher-for-longer interest rate environment, but they will benefit as rates come down.
Green Bonds
Beyond the equity market, green bonds are a financing tool for clean energy projects. Some green bond ETFs to consider include the iShares Green Bond ETF (BGRN) and the VanEck Green Bond ETF (GRNB). For investors looking for tax-free municipal bond exposure, there is the Franklin Municipal Green Bond Fund (FLMB). These ETFs also offer attractive bond yields ranging from 4-5% taxable and 3.8% federally tax-free.
The path to Net Zero is uncharted and certainly not linear. However, economic incentives and a partnership approach with energy, utility, and chemical companies, such as Carbon Capture Utilization and Storage, may ultimately become the most disruptive and viable solution.
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