Global X Rolls Out Carbon Credit Futures ETF, Eyes China’s Market

The new Global X Carbon Credits Strategy ETF (NTRL), which started trading May 25, offers investors exposure to the markets for carbon credits established by cap-and-trade emissions schemes. 

The new exchange-traded fund has an expense ratio of 0.39% and invests in futures that track four carbon credits markets in the European Union, U.K., California and the Regional Greenhouse Gas Initiative—a cooperative effort by several states in the Northeastern U.S.  

The fund joins six other carbon-credits ETFs which total $926 million in assets under management, according to etf.com data.  

As pressure to address the climate crisis increases, Global X expects carbon futures to grow as an asset class, expecting carbon credit prices in the EU, the largest such market, to rise to over €120/ton by 2030, up from under €100/ton in 2022.  

A cap-and-trade program, also called an emissions trading scheme, establishes certain quotas of greenhouse gas emissions for different firms. If the firm emits below the specified limits, it can trade its excess to other companies who can’t get below the limit.  

The idea is that companies will be incentivized to cut emissions by more than their targets in order to sell the excess credits, encouraging innovation.  

“It’s a unique asset class,” said Yili Wu, sustainable investing strategist at Global X. “We’ve seen low correlation with a number of different asset classes including U.S. equity, crude oil, various fixed income. It’s kind of an alternative asset that way.”  

“The big reason for this is that, unlike other assets classes, carbon futures aren’t really tied to economic factors like commodities are,” she added. “Instead, the markets are largely influenced by the decisions of legislators and regulators who established and manage these programs.”  

Currently the fund has 52.6% of its assets in futures tracking the EU carbon markets, 20.5% tracking California’s carbon market, 19.6% tracking the U.K. markets and 4.9% tracking the RGGI. “We try to limit exposure to the EU markets at about 50%, because it makes up about 87% of total carbon credits markets,” said Wu. 

The key potential area for growth is China, which launched an emission trading scheme in 2022, which, as it is expanded to encompass more industries, could increase the total carbon credit market by 70%. 

However, the issuer expects it to take a few years before there are derivatives tracking China’s market.  

“It’s hard to say, over the next five to 10 years, we’re hopeful we’ll see more derivatives for other emissions trading schemes,” Wu noted. 

Performance of the asset class has diverged widely depending on the ETF. The KraneShares Global Carbon Strategy ETF (KRBN), which is the largest carbon fund, with $584 million in AUM, is up 0.71% year to date. 

Overall performance of carbon ETFs has been uneven: Year-to-date returns range from 5.8% for the KraneShares California Carbon Allowance Strategy ETF (KCCA) to –90.3% for the KraneShares Global Carbon Offset Strategy ETF (KSET).  

For comparison, the large cap stock ETF, the SPDR S&P 500 ETF Trust (SPY), returned 8.8% year to date and the broad-based iShares S&P GSCI Commodity Indexed Trust (GSG) returned –9.8% year to date. 

Contact Gabe Alpert at [email protected]