KCCA
KraneShares California Carbon Allowance Strategy ETF
stock NYSE ETF

**Attractive Features**
· Tax-Efficient—the 5%+CPI escalator can be viewed as dividend- or coupon-like, but it is simply a feature that drives prices higher.  CCAs deliver no interest or dividends and so grow with tax deferred until sale when gains are taxed as long-term capital gains
· Right way asymmetry—Where equities and credit are at rich levels, the asymmetry in CCAs is positively convex
* Downside protected by Auction Reserve Price with upside from (i) tightening of allowance supply, (ii) higher inflation, and (iii) economic growth leading to more emissions
· Low beta
* Intuitive given CCAs trade near the Auction Reserve Price and so are less sensitive to market beta
* As prices move above the Auction Reserve Price, vol and market beta will increase as the “up/down” becomes more symmetrical
· Diversifying—risk factors are different from those of traditional equity, fixed income, and credit
* Legislative and Regulatory risk in California scares some investors off, but the risk is diversifying to most portfolios and analyzable.
· Explicitly inflation protected—Auction Reserve and Price Containment Levels increase annually with inflation.
· Aligned with the California—Government revenues increase with higher CCA prices
* Governor and legislature have stated a priority to pass legislation extending cap-and-trade through 2045
* Costs California meaningful revenues as more auctions take place without an extension
* Liquid—an ETF (KCCA) is the only public markets way to access CCAs and it does make some taxable distributions that may be undesirable.
* Investing in a private partnership or SMA—often with monthly liquidity—is a potentially more attractive for tax efficiency.
* Underfollowed—Very few institutional investors have a “carbon” strategy or research effort.  A private markets team (private credit, private equity, venture capital, etc.) is not incentivized or tasked with investing in carbon.  Nor are public equity investors whether generalists or sector specialists.  These are not bonds or loans covered by credit desks.  To trade the “physical” CCA, an investor needs to register with the California Air Resources Board for an account that allows them to participate in the quarterly auctions and settle any acquisition via futures physically.  These accounts take months—and often quarters—to establish.  Further, CARB limits the number of CCAs an individual holder (e.g. investment firm) can hold, thus limiting the potential size of investments firms can make, though there is no limit on futures holdings.

**Attractive Features**
· Tax-Efficient—the 5%+CPI escalator can be viewed as dividend- or coupon-like, but it is simply a feature that drives prices higher.  CCAs deliver no interest or dividends and so grow with tax deferred until sale when gains are taxed as long-term capital gains
· Right way asymmetry—Where equities and credit are at rich levels, the asymmetry in CCAs is positively convex
* Downside protected by Auction Reserve Price with upside from (i) tightening of allowance supply, (ii) higher inflation, and (iii) economic growth leading to more emissions
· Low beta
* Intuitive given CCAs trade near the Auction Reserve Price and so are less sensitive to market beta
* As prices move above the Auction Reserve Price, vol and market beta will increase as the “up/down” becomes more symmetrical
· Diversifying—risk factors are different from those of traditional equity, fixed income, and credit
* Legislative and Regulatory risk in California scares some investors off, but the risk is diversifying to most portfolios and analyzable.
· Explicitly inflation protected—Auction Reserve and Price Containment Levels increase annually with inflation.
· Aligned with the California—Government revenues increase with higher CCA prices
* Governor and legislature have stated a priority to pass legislation extending cap-and-trade through 2045
* Costs California meaningful revenues as more auctions take place without an extension
* Liquid—an ETF (KCCA) is the only public markets way to access CCAs and it does make some taxable distributions that may be undesirable.
* Investing in a private partnership or SMA—often with monthly liquidity—is a potentially more attractive for tax efficiency.
* Underfollowed—Very few institutional investors have a “carbon” strategy or research effort.  A private markets team (private credit, private equity, venture capital, etc.) is not incentivized or tasked with investing in carbon.  Nor are public equity investors whether generalists or sector specialists.  These are not bonds or loans covered by credit desks.  To trade the “physical” CCA, an investor needs to register with the California Air Resources Board for an account that allows them to participate in the quarterly auctions and settle any acquisition via futures physically.  These accounts take months—and often quarters—to establish.  Further, CARB limits the number of CCAs an individual holder (e.g. investment firm) can hold, thus limiting the potential size of investments firms can make, though there is no limit on futures holdings.