California’s Carbon Allowances (CCA) market is now extending its reach.
Last Friday, the state of Washington passed legislation to link the Washington state cap-and-invest program to the CCA market. The CCA market already includes both California and Quebec. The National Caucus of Environmental Legislators notes that the first four auctions of Washington’s program resulted in a whopping $1.8 billion in revenue.
“Linking these programs creates a larger, more liquid market, leading to greater price stability and market efficiency. It would also mitigate potential carbon leakage issues, helping prevent Washington’s industries from being at a competitive disadvantage due to higher carbon prices compared to other programs and entities not subject to carbon pricing,” KraneShares noted in recent insights.
However, Washington’s carbon allowance market is seeing some volatility. KraneShares noted that Washington’s carbon prices have dropped significantly in recent months, owing to buyer uncertainty over the program’s future. An initiative to repeal the state’s Climate Commitment Act, which includes the state’s carbon allowance market, will be on the November ballot in Washington.
“Much of the weakness is due to uncertainty about the program’s long-term future, with traders said to be particularly concerned at the possible loss in value of substantial holdings if the initiative is passed,” KraneShares added.
Persevering Plans
Despite some signs of opposition, Washington continues to soldier on with climate legislation. Washington Governor Jay Inslee notes that companies such as Microsoft and BP are launching a campaign to defend the program. The state also passed several climate-friendly policies along with the carbon market link, including the development of zero-emission school buses.
If the repeal initiative fails at the ballot box, Washington’s carbon allowance prices could grow due to investor confidence. This could bolster the CCA program’s gains. According to KraneShares, CCA prices were up 2.8% last week compared to the week prior.
The KraneShares California Carbon Allowance Strategy ETF (KCCA) stands to benefit from the expanded CCA program. The fund is benchmarked to the IHS Markit Carbon CCA Index and provides investment exposure to the growing CCA market.
While the fund is currently in the red, adding the Washington carbon market could breathe fresh air into the fund’s performance. Some investor confidence is mounting, with KCCA seeing over $5 million in net flows over the last month. This momentum could skyrocket if the Washington repeal initiative fails at the ballot box.
KraneShares currently has 26 ETFs listed in the United States, many of which are climate-aligned. One example is the KraneShares Global Carbon Strategy ETF, which currently oversees about $297 million in assets under management.
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