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11 Jul 2024 | 19:27 UTC
By Daniel Weeks and Ander Garcia
Highlights
Secondary market prices drop $1.50/mt on day
Workshop proposes removing up to 265 million allowances
Prices stumbled in the secondary carbon market July 11 after the California Air Resources Board confirmed a year delay in the implementation of updated regulations.
Market participants were looking for new policy rulemaking to be implemented in 2025, however CARB announced in its July 10 meeting that the timeline to complete the rulemaking process is early 2025 and removals would begin with 2026 future vintage allowances, confirming a delay in implementation by a year.
The secondary market reacted soon after this confirmation, causing prices to fall. During the initial workshop notice on June 26, prices received a boost as traders and markets participants started to short cover in advance.
Platts, part of S&P Global Commodity Insights, assessed the current-month, next-month and next-December allowances prices at $37.38/mt, $37.59/mt and $38.35/mt, respectively, on July 9 before the outline was made public.
The day the outline was made public, Platts assessed the current-, next-month and next-December allowances prices at $35.86/mt, $36.06/mt, and $36.80/mt, respectively, all down between $1.52-$1.55 on the day.
"[The drop] was predominantly due to the delay in implementation, previously there was still a decent probability that the changes would take effect in 2025, but [CARB] said that's unlikely now," a New York-based trader said July 11.
The July 10 workshop was the last of several that CARB staff hosted regarding potential regulation changes before a first draft of the rulemaking changes coming later this year. This latest workshop was focused on allowance budget scenario evaluations.
Under the 2016 rulemaking, the current emissions reduction target from 1990 by 2030 targets a 40% reduction. However, in 2022, bill AB 1279 passed, mandating a reduction in anthropogenic greenhouse gas emissions by 85% below 1990 levels and achieve carbon neutrality by 2045. Since the bill passed, CARB's scoping plans from 2022 show a need to increase 2030 emissions reduction from 40% to 48% to achieve the more ambitious 2045 targets.
Allowance budgets must decline to 30.3 million allowances by 2045 to achieve that 85% AB 1279 target. This latest workshop focused on showing potential scenarios consistent with the 48% target for cumulative budgets for 2030 with a smooth post 2030 transition.
The first option consists of a removal of 180 million allowances from 2026-2030 and a linear decrease of allowances post 2030. According to CARB, this is the least disruptive option to regulated entity financial planning. The second option proposes to remove 265 million allowances from 2026-2030, and post-2030 an allowance budget would remain consistent until 2036, where it would then decrease linearly to 2045.
CARB members briefly commented on potential future linkage with Washington state's cap-and-invest carbon market, saying they were in discussion with Washington officials to provide support on the state Department of Energy's rulemaking efforts.
"We want them to be successful and need to them to be successful, because we need many more states to ... be able to implement these programs and push on reductions in greenhouse gases," Rajinder Sahota, Deputy Executive Officer for Climate Change and Research at CARB, said.
Washington state is currently in a development stage, seeking public comments by Sept. 27 that will be used to revise the language of linkage rulemaking.
After this development stage, the department will propose its new rules starting in 2025 with additional opportunities for public input. The department will conduct a final assessment on the potential impact of linkage before a final decision is made.
"These programs don't need to be identical in order for linkage to occur, but they do need to have similar ambitions overall, which California, Washington, and Quebec do," Matt Williams, emissions and clean energy analyst at Commodity Insights, said.
Washington's program offers comparatively fewer allowances compared to the larger California-Quebec program, which is roughly six times larger than Washington's market, according to the state's Department of Ecology.
The differing supply and demand dynamics of the two carbon markets could lead to increased prices across all three jurisdictions(opens in a new tab) should linkage successfully occur, Williams said.
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