A market-based regulatory system in which governments set a cap on total greenhouse gas emissions and issue a corresponding number of allowances. Companies that emit less than their allocation can sell surplus allowances to those that need more. The cap typically declines each year, progressively reducing total emissions and tightening allowance supply.

A government-issued permit that gives the holder the right to emit one tonne of carbon dioxide equivalent (CO2e). Carbon allowances are the tradeable units within cap-and-trade systems. Unlike voluntary carbon offsets, allowances are compliance instruments — regulated emitters are legally required to surrender enough allowances to cover their annual emissions.

The world’s oldest and largest cap-and-trade system for carbon emissions, launched in 2005. The EU ETS covers approximately 40% of the EU’s greenhouse gas emissions across power generation, heavy industry, and aviation in 27 EU member states plus Iceland, Liechtenstein, and Norway. European Union Allowances (EUA) are the compliance units traded within this system.

California’s compliance carbon market, administered by the Air Resources Board (CARB), covering approximately 80% of the state’s greenhouse gas emissions. The program features an annual 4% cap reduction and a price floor that increases by 5% plus CPI each year, providing structural support for carbon prices. California Carbon Allowances (CCA) are the units traded within this system.

An unsecured debt security issued by a financial institution that promises to pay returns linked to the performance of an index. Unlike an ETF, an ETN does not hold any underlying assets — its value depends on both the index performance and the creditworthiness of the issuer. If the issuing bank defaults, ETN investors could lose their entire investment.

A pooled investment vehicle — often a trust or partnership — operated to trade commodity interests such as futures, options or swaps. The commodity pool operator, not the pool itself, is generally the party registered with the CFTC (Commodity Futures Trading Commission), unless an exclusion or exemption applies. Tax reporting follows the product's legal structure: partnership-structured funds such as CPER issue Schedule K-1 forms instead of a 1099, but not every fund that uses commodity derivatives does so — registered investment companies can hold commodity futures too.

The annual fee an ETF charges to cover stated operating costs such as management and administration, expressed as a percentage of assets. Depending on the source it may be quoted gross or net of contractual fee waivers. It does not capture every cost of owning a fund: brokerage commissions, bid-ask spreads, any premium or discount to NAV, and — for futures funds — roll effects are all separate. All else equal, a lower expense ratio means less annual fee drag on returns.

The net value of the assets an ETF holds. AUM indicates fund scale, but it does not by itself determine liquidity or trading costs; bid-ask spreads, trading volume, market makers and the liquidity of underlying holdings also matter. AUM changes with market prices and fund inflows or outflows.

Carbon credits ETFs are exchange-traded funds that invest in futures contracts tied to carbon emissions allowances from cap-and-trade programs. These programs, such as the EU Emissions Trading System and California’s cap-and-invest program, require regulated companies to purchase allowances for each tonne of CO2 they emit. Carbon credits ETFs give investors exposure to the price of these allowances without directly participating in the compliance market.

Carbon allowance prices are set by supply and demand within government-regulated cap-and-trade systems. Governments set an annual cap on total emissions and issue a corresponding number of allowances. As the cap declines each year, supply decreases, which can push prices higher if demand remains steady. Prices also respond to energy market conditions, weather, economic activity, and policy changes.

An ETF (Exchange-Traded Fund) holds actual assets such as futures contracts or equities. An ETN (Exchange-Traded Note) is an unsecured debt obligation issued by a bank that promises to pay returns linked to an index. ETNs carry issuer credit risk — if the issuing bank defaults, investors could lose their investment regardless of index performance. GRN is an ETN issued by Barclays, while KRBN and KCCA are ETFs.

A K-1 (Schedule K-1) is a tax form issued by partnerships and commodity pools that reports each investor’s share of income, deductions, and credits. None of the three products on this list issues one. KraneShares states that KRBN does not provide a K-1: KRBN and KCCA are series of the KraneShares Trust, a registered investment company, and hold their futures exposure through a wholly owned Cayman Islands subsidiary — a structure used specifically to preserve Form 1099 reporting. GRN is an ETN and is also reported on a 1099, though ETN taxation has complications of its own. Product-level tax treatment can change, so confirm current reporting with the sponsor, the fund’s or note’s current offering documents, or your broker before filing.

The major cap-and-trade programs tracked by carbon credits ETFs include the EU Emissions Trading System (EU ETS), California’s program — known as Cap-and-Trade until September 2025 and as Cap-and-Invest since the state extended it through 2045 — the Regional Greenhouse Gas Initiative (RGGI) in the northeastern US, the UK Emissions Trading Scheme, and Washington State’s Cap-and-Invest Program. KRBN provides broad exposure across multiple programs, while KCCA focuses exclusively on California.

Carbon allowances have structural characteristics that may provide some inflation protection. California’s cap-and-invest program sets an auction reserve price that rises annually by 5% plus CPI, which lifts the minimum price the state accepts at its own allowance auctions over time. Tightening emissions caps also reduce supply, which can support prices independent of broader economic conditions. However, carbon prices are volatile and influenced by many factors beyond inflation, and the auction reserve price does not put a floor under a fund’s share price, so these products should not be viewed as a direct inflation hedge.