Many of the fundamentals that drove North American compliance carbon market prices to record highs in 2023 — including formal program reviews and supply side adjustments — will remain at center stage in 2024.

California-Quebec Joint Cap-and-Trade Program’s Momentum

California and Quebec on Jan. 1 marked the 10th anniversary of the linkage of their joint cap-and-trade programs, but even after a decade, the programs continue to evolve. The California Air Resources Board (CARB) in 2023 worked on proposed amendments to its cap-and-trade regulations, and that process will continue in 2024.

Discussions of increasing emissions reductions targets while addressing potential allowance oversupply helped to push California Carbon Allowance prices higher in 2023, with values rising to a record high of $39/metric ton in December for current year prompt delivery, up from $27/mt at the start of 2023.

The California-Quebec joint cap-and-trade quarterly allowance auctions also had strong buying interest, with each selling out and reaching an all-time high settlement price of $38.73/mt in the fourth quarter of 2023.

The upward momentum is poised to continue in 2024. “We are expecting CARB to finish the program review process sometime in 2024, with different price points depending on what scenario CARB ends up choosing,” said Anop Pandey, an analyst at ClearBlue Markets.

Depending on which 2030 emissions reduction target CARB decides to enact, CCA prices could end 2024 at $45.50/mt if the 40% target is adopted, $52.06/mt if the 48% target is adopted, and $68.45/mt if CARB moves forward with the 55% target, Pandey said. “As of now, we still think 48% is the most likely scenario,” he added.

CARB also proposed allowance supply changes that have the potential to give prices additional lift and is considering allowance budgets that could remove between 115 million to 390 million CCAs from either future auction price containment reserves, price ceilings or auction and allocation pools. And the agency is evaluating holding limits on banked allowances.

In addition, Quebec is mulling changes to its California-linked cap-and-trade program, including strengthening the province’s emission-reduction goals, limiting the use of offset credits for compliance purposes and the possible removal of 17 million allowances from the supply pool between 2025 to 2030.

Washington State’s Evolving Cap-and-Invest Market

Meanwhile, Washington state’s cap-and-invest market begins 2024 on the heels of an active inaugural year of secondary market price swings and regulatory adjustments.

In 2024 the state Department of Ecology will continue to pursue linkage with the California and Quebec programs under the Western Climate Initiative (WCI). While such a linkage, if agreed to by all parties, would not occur until 2025, Washington has prepared a number of proposed program and legislative changes it will focus on in 2024 to align its program more closely with California and Quebec’s.

Yet a more immediate factor that could affect prices in the new year is the updated allowance price containment rules that the Washington Department of Ecology announced in late 2023 in response to rapidly rising compliance costs.

In 2023, both the second- and third-quarter Cap-and-Invest auctions triggered supplemental Allowance Price Containment Reserve auctions after settling above the $51.90/mt trigger price.

At the Cap-and-Invest program’s first-ever APCR auction in August 2023, the reserve allowances offered were split between the $51.90/mt Tier 1 and $66.68/mt Tier 2 prices. In that fully subscribed APCR auction, Ecology sold all 527,000 WCAs offered at the Tier 1 APCR price and 527,000 WCAs offered at the Tier 2 price.

After a second APCR auction was triggered in the Q3 allowance auction, Ecology announced that the second APCR auction in November would offer allowances only at the Tier 1 price of $51.90/mt rather than both the Tier 1 and higher Tier 2 prices.

Regulators also announced allocation of an additional 1 million reserve allowances for 2024, pulling from the 2026 APCR pool to increase supply earlier in the first compliance period.

Those changes seemed to have had the desired impact, as the regularly scheduled fourth quarter auction settled below the APCR trigger price.

Amid these program updates, OPIS WCA price assessments dropped about $15/mt from early September (before the Q3 auction results) to around $52/mt by mid-December 2023.

Pandey forecast current vintage WCA prices of $56.57/mt in the secondary market for 2024, with price signals continuing to come from Washington-specific fundamentals, despite the state’s intent to link to California and Quebec’s program in the future.

“As of right now without reciprocal announcement from California and Quebec, we do not expect the Washington linkage announcement to have an impact” on WCA prices, Pandey explained. In the meantime, Washington allowance prices “will continue to reflect the market fundamentals of Washington only.”

Regional Greenhouse Gas Initiative Prices at Record Highs

On the East Coast, Regional Greenhouse Gas Initiative (RGGI) allowance prices begin 2024 at or near record highs, propped up by similar fundamentals to those seen in California: the prospect of tightening allowance supply and emissions reductions goals amid a formal program review.

Secondary market allowance prices climbed above $15/st in December, as the Q4 auction clearing price rose to a record high of $14.88/st. The auction settlement price also triggered the release of cost containment reserve allowances for the first time since 2021.

The current program review began in 2021 and was expected to conclude by the end of 2023. The process will however extend into 2024.

The short-term upside for RGGI prices may be capped by a 2024 CCR trigger price of $15.92/st, at least pending further developments from the ongoing program review, which have the potential to shed light on future allowance supply fundamentals.

Meanwhile, the list of RGGI member states is also set to shrink in 2024. Virginia is on track to withdraw from RGGI by the end of 2023 following the state’s Air Pollution Control Board vote in June to end its participation in the program, fulfilling a campaign promise to do so from Gov. Glenn Youngkin.

In Pennsylvania, a Commonwealth court in November barred the state from participating in the program, ruling that revenue raised from the program was an “invalid tax” that the Department of Environmental Protection does not have the constitutional authority to collect.

Pennsylvania’s active participation in the program was immediately put on hold pending the outcome of legal proceedings.

Pennsylvania Gov. Josh Shapiro appealed the most recent decision to the state’s supreme court in November, although Shapiro’s level of commitment to RGGI itself is unclear.

“The Commonwealth Court’s decision on RGGI – put in place by the prior administration – was limited to questions of executive authority, and our administration must appeal in order to protect that important authority for this administration and all future governors,” a Shapiro spokesperson said in a statement following the appeal.

Shapiro has previously expressed both concerns about RGGI’s efficacy in achieving the state’s climate goals as well as an openness to considering potential alternatives.

Meanwhile, Regional Greenhouse Gas Initiative member state New York is expected to publish draft rulemaking on its forthcoming cap-and-invest program in 2024, with a potential program launch in 2025.

The design of the cap and invest program will take into account the state’s ongoing participation in RGGI and is being developed to allow future linkage with established emissions trading programs, such as California or Washington, according to state officials.

–Editing by Kylee West, kwest@opisnet.com and Jeff Barber, jbarber@opisnet.com