Great expectations: How legacy issues could snuff out California's carbon market boom

The price of carbon is ultimately determined by the intersection between the demand and supply of allowances. However, underpinning this is the role that expectations play. Carbon markets - in particular since they are a political construct - ultimately stand or fall on the confidence of market participants in the long term robustness of the market. Expectations matter, and they influence both present day demand and supply, and ultimately price.

As I noted in my earlier article, California will need to more than double the annual rate of emission reductions to 4.3% in order to meet the 2030 emission reduction goal. The California climate regulator, California State Air Resources Board (CARB) has called for the state’s carbon trading scheme to deliver nearly half of the emission reductions needed. Even more aggressive emission reduction cuts will be required after 2030, potentially placing even more burden on the carbon market.

However, the past may come back to haunt it.