The regulator for the California carbon market held its most recent public workshop this week. On guidance of delaying tightening within the market for another year, carbon allowance prices dropped. While short term investor expectations failed to align with the newest updates, the long-term outlook remains the same for the market.
The California Air Resources Board (CARB) announced a bevy of new proposals in its most recent workshop, reported KraneShares in the Climate Market Now blog. These included two new trajectories for tightening and market cap adjustments, as well as a year’s delay in their implementation.
Both proposals rely on reductions in the auction volume and free allowance allocations to meet their 2030 targets of 48% emissions reductions. This creates favorable potential carbon allowance price appreciation as opposed to previous proposals that removed allowances from the price containment reserves. These reserves allow for control of market volatility and work to reduce sudden surges in price. Both trajectories also target 85% reductions by 2045.
One proposed path reduces the market cap by 10% through 2030 before declining in a linear trajectory to 2045 goals. The second reduces the market cap by 14% through 2030, maintaining the level until 2036 before declining to the 2045 target.
Image source: KraneShares
“CARB pointed out that despite their different paths, the two new alternative options (as well as the SRIA analysis) encompass the same cumulative allowance budgets to achieve the 2045 goal,” explained KraneShares.
CCA Prices Plummet on CARB’s Announced Delay
The largest surprise was CARB’s revelation that it would push implementation back a year due to rulemaking needing more time. Adjustments to cap and ceiling prices, as well as liquidity reserve tiers, will not go into effect until 2026 instead of the first half of 2025.
The market regulator also announced lower-than-anticipated emissions between 2012-2017. This, in turn, requires adjustments to supply through 2030.
Carbon allowance prices dropped in the wake of CARB’s workshop. California carbon allowances dropped 5.63% week-over-week as of July 12 and are down 14.82% YTD, according to Kraneshares data.
“Regardless of the exact trajectory chosen, CARB’s long-term commitment to pursue significant tightening sends bullish signals for the market,” KraneShares wrote. “We also expect the market will continue to demand tighter from CARB in the future.”
Those investors seeking to capture exposure to California’s carbon market at current reduced prices should consider the KraneShares California Carbon Allowance Strategy ETF (KCCA).
The fund offers targeted exposure to the joint California and Quebec carbon allowance markets. The market is one of the fastest-growing carbon allowance programs worldwide. Its benchmark is the S&P Carbon Credit CCA Index. The CCA includes up to 15% of the cap-and-trade credits from Quebec’s market.
The index tracks the most traded CCA futures contracts. The fund uses a wholly-owned subsidiary in the Cayman Islands to prevent investors from needing a K-1 for tax purposes.
KCCA carries an expense ratio of 0.81%.
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