California carbon prices expected to be at year-to-date lows in upcoming auction

California carbon allowance costs are expected to clear at the lowest levels so far this year in the Aug. 14 third quarter auction, S&P Global Commodity Insights analysts project, as the market experiences volatility from rulemaking delays.

Commodity Insights analysts expect the Q3 auction to clear between $33.00-$33.50 per California carbon allowance, according to the Aug. 12 edition of the California Emissions Trading System Market Outlook. The high end of this estimate would reflect a 10% decrease quarter on quarter and a 5% decrease year on year.

The latest current month strip price assessment from Platts, part of Commodity Insights, showed Vintage 2024 CCA prices at $32.96/alw. This is a 3% increase from this year's lowest price assessment on July 30, but is still a 17.6% decline from the start of the year.

The monthly average of Vintage 2024 December CCA prices dropped 2.9% in July month on month. This is the second month in a row to see an average price decline, Commodity Insights analysts say.

CCA prices are deflated from the start of the year in part due to the California Air Resources Board's July 10 workshop, where program officials announced a delay in plans to reduce the supply of carbon allowances.

CARB and Quebec's Ministry of Environment and the Fight Against Climate Change's goal with the cap-and-trade carbon market is to cut down on the program's carbon allowances over time, reducing the CO2 emissions of market participants.

The delay in implementing program cuts by one year resulted in downward pressure on allowance prices, causing them to drop below Washington state carbon allowance prices, which typically trade at a premium to CCAs. The latest Aug. 2024 WCA price was settled at $34.89/alw on Aug. 12, according to Intercontinental Exchange data.

More public comment submissions are in favor of CARB's proposed "Option 1" from its July 10 workshop, which would remove 180 million allowances from the 2026-2030 budgets and sees a linear cap decline post-2030, Commodity Insights analysts said in the market outlook.

Option 1, which has a potential allowance budget cap of 233 million in 2026, provides more "certainty and assurance," according to comments submitted by the California Farm Bureau, the state's largest agricultural association.

The state must consider the costs associated with any plan implemented by CARB, the CFB said in its comments.

"Currently, California's electricity prices are the second highest in the country," the comment reads. "Any increased emission reduction targets will result in higher energy prices felt by all Californians."

Demand for electricity in California rose 14% in July month on month, but remained flat year on year despite heat waves, according to Commodity Insights analysts. Additionally, Low Carbon Fuel Standard Q1 data showed a 38% year-on-year decline in fossil diesel demand, "by far the lowest quarterly volume ever," the analysts said.