California's emissionary zeal begins to crack

Carbon market tumbles as climate policies are delayed

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A strong carbon price is a signal that investors, businesspeople, and citizens trust their government’s commitment to combat climate change. It is the ‘Currency of Decarbonisation’.

It’s in this context that we should view how the Californian carbon market was behaving earlier in 2024. The price of Californian Carbon Allowances (CCAs) surged to more than $40 per tonne in February. Speculators and other market participants were emboldened by the state’s political commitment to emission cuts, and optimism that policy reforms would tighten the market for CCAs.

In 2022, a bill was passed mandating a reduction in California’s emissions by 85% below 1990 levels by 2045. To meet the more ambitious 2045 targets the California Air Resources Board (CARB) developed a series of scoping plans illustrating that emission cuts under the cap-and-trade scheme would need to rise to 48%, up from 40% previously (see Is a repeat of 2021 on the cards for California's carbon market?).

CARB holds regular workshops (~5 per year) updating market participants on potential amendments to the states cap-and-trade regulations. The meetings give a regular insight into how CARB, and by extension California’s politicians, are thinking about the future of the market.

The 31st May workshop made no mention of a delay, but perhaps it was the absence of a firm commitment to the implementation schedule that spooked the market. Over the following month the CCA price fell by 10%, and after a brief short covering rally in late June the market plunged by 20%.¹

During the 10th July workshop the news came that CARB had pushed back the timeline for new regulations by one year. The rulemaking process is now expected to be completed in early 2025 with the changes taking effect in 2026. What’s interesting is that rather than rallying on the news that the rumour had been confirmed, the market has continued to fall even deeper. Overall, the CCA price has dropped by ~35% since its February highs to around $27 per tonne.²

Note: The KCCA ETF is used as a proxy for the CCA price.