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 legal structure used by some ETFs that trade commodity futures contracts. Commodity pools are registered with the CFTC (Commodity Futures Trading Commission) and issue K-1 tax forms to investors instead of the standard 1099. This can add complexity to tax filing but allows the fund to directly hold futures positions in commodities markets.

The annual fee charged by an ETF to cover management, administration, and operational costs, expressed as a percentage of assets under management. A lower expense ratio means less drag on returns over time.

The total market value of all investments managed by an ETF. Higher AUM generally indicates greater liquidity, tighter bid-ask spreads, and lower trading costs for investors. AUM fluctuates 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-Trade 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. Carbon credits ETFs structured as commodity pools, such as KRBN and KCCA, issue K-1 forms instead of the standard 1099 forms. This can add complexity to tax filing. GRN, as an ETN, issues a 1099 and does not require a K-1.

The major cap-and-trade programs tracked by carbon credits ETFs include the EU Emissions Trading System (EU ETS), California’s Cap-and-Trade Program, 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-Trade Program includes a price floor that increases annually by 5% plus CPI. Additionally, tightening emissions caps reduce supply over time, which can support prices independent of broader economic conditions. However, carbon prices are volatile and influenced by many factors beyond inflation, so they should not be viewed as a direct inflation hedge.