HomeMost PopularExploring Luke Oliver's Insights on 2024 Carbon Market Investments

Exploring Luke Oliver’s Insights on 2024 Carbon Market Investments

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Amidst the murky macroeconomic outlook in the U.S, grappling with persistent inflation while celebrating robust economic indicators, the buzz about AI and fluctuating Fed interest rates has dominated the narrative in both headlines and markets this year. Nestled beneath this frenzied hubbub, however, lies a golden opportunity for carbon market investors.

In a recent interview, I delved deep into the 2024 carbon market outlook with Luke Oliver, the managing director, head of climate investments, and head of strategy at KraneShares.

Karrie Gordon, staff writer, VettaFi: Luke, I greatly appreciate your time today. Letโ€™s navigate the challenging investment landscape this year. How does the macro environment impact carbon market investments in 2024?

Luke Oliver, managing director, head of climate investments, KraneShares: ESG and climate are different realms. Climate investments revolve around propelling the energy transition and greening the global economy. Itโ€™s not about trendy ESG measures; itโ€™s about seizing tangible economic prospects that are unfolding before us. The pace is staggering, akin to tectonic shifts, but moving at a breakneck speed.

Government policies and expenditure patterns are broadcasted extensively. For investors, aligning with these initiatives is the key. Itโ€™s not merely about ESG checkboxes; itโ€™s about reaping the rewards of actual economic shifts. The opportunities are monumental, particularly in the energy sector, focusing on innovative, scalable, low-carbon solutions. At KraneShares, the proliferation of imitating investment ideas in our arena, like metals, indicates that we are on the right trajectory. We have been pioneers in the U.S. transition equities narrative, and we remain staunch believers in the carbon story, as the current levels present a remarkable opportunity.

โ€˜Focusing on Europe and Californiaโ€™

Gordon: KraneShares has been trailblazers in various climate segments such as carbon allowances, electrification metals, and carbon offset credits. Your Global Carbon Strategy ETF (KRBN) was the pioneer global fund providing exposure to carbon allowances. Where do you envisage the prospects in carbon markets this year?

Oliver: Recent years saw Europe grappling with appropriate carbon pricing, witnessing significant returns that have now stabilized. Despite this equilibrium, the normalized returns continue to outperform market benchmarks. Defying inflation, these returns hover around 20 percent annually, with California yet to undergo its own price discovery phase.

Consequently, California holds the propensity for explosive growth, and even post-normalization, the structural fabric remains robust. While the UK and RGGI reflect similar narratives in a milder vein, Europe and California emerge as the prime focal points for us. Lately, California has shown price movements, escalating by 34% last year, with a ceiling nowhere in sight yet. Through intricate modeling, we can forecast the current value of California, factoring in the depletion of allowances surplus by 2029.

Insights Into Californiaโ€™s Carbon Market

Gordon: Could you shed light on your price forecasting methodologies and why you hold a positive outlook specifically for California?

Oliver: If the surplus diminishes, companies must resort to the first liquidity tier, making price modeling a breeze โ€“ inflatio โ€˜>when it eventually rolls outโ€™. A short and clear path and at the end California climate Allowance will be value almost at $82.99 when it comes to 2029. The third method will be to discount this to present-day value. The final value would be close to $60 per ton, with the current trading price at $42. Despite the logical progression, the current market dynamics are more focused on supply-demand notions rather than treating carbon allowances as financial assets.

Underpinning current prices are commodity-centric considerations instead of perceiving carbon allowances as non-perishable, easy-to-transact financial instruments.

Inroads Into the European Market

Gordon: You emphasized Europe as a pivotal realm for investment this year. Would you elaborate on that?

Oliver: Amidst the European market correcting prices to the 80-100 euro span, a resurgence in trading activity is anticipated. Initiatives like REPowerEU accelerate the process by front-loading auctions. Our original surplus decline model is complemented by the recent auction dynamics. Despite auction volume nuances, both models converge toward a common 2029 projection.

A chart illustrating the original supply and demand balance for EUAs and the impact of REPowerEU in advancing allowances for auction.

Image source: KraneShares

Nevertheless, traditional market participants in gas, oil, or power sectors often succumb to selling pressures due to prevailing clearing prices. Storage complexities prompt an โ€˜use it or lose itโ€™ approach. Conversely, strategic investors can capitalize on the current depressed prices to secure long positions, anticipating a potential rally from 55 to 90 euros, and possibly even aiming for 140 euros. This marks an almost 60% surge, laden with promise.

Gordon: Luke, this conversation has been enlightening and enriching. Wrapping up, what guidance would you offer carbon investors in 2024?

Oliver: This year presents a lucrative buying juncture. Acquiring California and European investments gradually over the next six months is prudent. For the California market, adopting a staggered approach entails picking up assets amid upward trajectories and potential pullbacks, managing risk exposure effectively. In contrast, navigating the European market demands a steady accumulation strategy, remaining unfazed by transient downturns. While the path ahead may be rife with challenges, anchoring oneโ€™s position in these markets till 2030 and beyond is undeniably a sage move.

The KraneShares carbon allowances suite encompasses the KraneShares Global Carbon Strategy ETF (KRBN), the KraneShares California Carbon Allowance ETF (KCCA), and the KraneShares European Carbon Allowance ETF (KEUA).

For further updates, insights, and analysis, explore theย Climate Insights Channel.

Read more on ETFTrends.com.

The viewpoints expressed herein represent the authorโ€™s opinions and do not necessarily mirror those of Nasdaq, Inc.

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