California Carbon Allowances Auctioned at Record Highs

California carbon allowances prices continue climbing, closing at their highest level at the state’s quarterly auction this month. Recent price gains are a preview of what’s to come if recent state workshops are any indication of the trajectory of the market. Investors have an opportunity to buy in now via the KraneShares California Carbon Allowance ETF (KCCA).

Just one year ago, California Carbon Allowances (CCAs) were auctioned off at $27.00 per ton. The California Air Resources Board reported auction results this week with allowance prices settled at $35.20 per ton. California recently committed to more aggressive emissions-tightening measures.

Chart of the auction statistics from CARB's most recent auction. Current reserve price was $22.21 and settlement price was $35.20.

Image source: California Air Resources Board

The higher prices are likely in response to CARB’s workshops over the summer where the agency put forth three scenarios with emissions reductions ranging from 40-55% reductions by 2030.

Tightening supply will create positive price momentum for carbon allowances as the cost of polluting rises. Companies are hedging for these higher prices already, as evidenced by August’s auction.

Despite strong gains in recent months, current prices still have a long runway before they reach significant enough levels to drive a meaningful transition.

“On the one hand, $35 a ton is real money,” Dallas Burtraw, senior fellow at Resources for the Future, told Politico. “But the price by itself is not sufficient at this level to do the work of driving decarbonization in the California economy.”

Another potential reason for recent price gains is the conjecture that the joint California and Quebec cap-and-trade market could bring Washington’s recently launched program into the fold. Washington’s cap-and-trade system’s second quarterly auction, held in May, resulted in over 8 million allowances of the total 11 million allowances auctioned settling at $56.01 a ton.

Although the market is still a nascent one and prone to price fluctuations, higher allowance prices would drive up the overall market allowance price should Washington link with California and Quebec.

This California Carbon Allowances ETF a Strong Buy

KCCA offers targeted exposure to the joint California and Quebec carbon allowance markets. It stands to benefit from California’s aggressive push to reduce emissions alongside the increasing demand for allowances within the market.

Graph of KCCA's total returns and price returns YTD, as well as the fund's significant outperformance above both it's 50-day SMA and 200-day SMA.

The fund is up 21.44% YTD on a price returns basis and 22.94% on a total return basis.

KCCA remains solidly in “buy” territory. The fund remains significantly elevated above both its 50-day SMA and 200-day SMA. Funds above their SMAs are considered a buy for both investors and trend followers. It has been above both SMAs since March 21, 2023.

This market is one of the fastest-growing carbon allowance programs worldwide. Its benchmark is the IHS Markit Carbon CCA Index. The index includes up to 15% of the carbon credits from Quebec’s market.

KCCA’s index measures a portfolio of futures contracts on carbon credits issued by the CCA. The index only includes futures with a maturity in December in the next year or two. The fund also uses a wholly-owned subsidiary in the Cayman Islands, which makes a K-1 unnecessary for taxes.

KCCA carries an expense ratio of 0.78%.

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