California’s Cap-and-Trade Program Regulator Releases Price Models for First Time

California’s cap-and-trade program regulator, the Air Resources Board (CARB), presented price models for the first time last week.

This is a significant milestone for the space, marking the first time CARB has ever released its own price projections for the cap-and-trade program, according to KraneShares. Investors can look at these projected price levels to gauge the return potential for the market.

These price expectations are coming directly from the entity that regulates the California program. It offers valuable insight into the agency’s thinking on the ongoing reform measures, including the cap adjustments, KraneShares wrote.

CARB modeled four primary scenarios based on emissions reduction targets of 40%, 48%, and 55% below 1990 levels by 2030. However, in the business-as-usual scenario, prices would average $95 through 2040. For reference, last week, California Carbon Allowances reached a new high of $39.05.

According to CARB, most alternative scenarios yield prices that follow the price ceiling through at least 2035. Prices under these modeled scenarios would rise to around $115/tonne by 2030 and to $140 in 2035, KraneShares wrote.

In 2040, prices in scenario one would top $150/tonne, while the other scenarios would see levels above $175, KraneShares wrote.

Investors can get exposure to the California Carbon Allowances cap-and-trade carbon allowance program via the KraneShares California Carbon Allowance ETF (KCCA).

The carbon cap-and-trade market is designed to lower emissions by 5% per year from 2021 to 2030. Furthermore, between 2015 and 2020, the program reduced greenhouse gas emissions by around 3% a year, according to the Center for Climate and Energy Solutions (C2ES).

Investors can complement their exposure to the CCA program with the KraneShares European Carbon Allowance Strategy ETF (KEUA). The fund offers exposure to the European Union Allowances program, which is the world’s oldest and most liquid carbon allowance market.

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