California’s Carbon Auction Sees 11% Price Drop Amid Regulatory Uncertainty

Allowance prices for greenhouse gas emissions dropped by 11% in California’s quarterly joint carbon auction held in May 2024, breaking the recent trend of rising prices. This decline is due to uncertainty over how the state regulator will change auction rules.

The auctions are part of California’s Cap-and-Trade Program, run by the California Air Resources Board (CARB). CARB requires operators of natural gas-fired and coal-fired power plants, along with other companies, to buy allowances to offset their emissions. Each year, fewer allowances are offered as the cap on total emissions decreases. In the latest auction, all 51.6 million offered allowances were sold.

The Cap-and-Trade Program was created by California’s Global Warming Solutions Act of 2006 (AB 32) to reduce greenhouse gas emissions to 1990 levels by 2020, a goal achieved in 2016. Lawmakers have since set further reduction targets, aiming to reduce emissions by 85% below 1990 levels and achieve carbon neutrality by 2045. The program limits emissions from major sources of greenhouse gases in California. In 2021, the electric power sector accounted for 10.9% of the state’s emissions.

For each auction, CARB creates allowances equal to the total permissible emissions and sets a cap. CARB also sets a minimum price for the allowances, which rises annually. Companies must hold allowances equal to their greenhouse gas emissions, which can be obtained through allocation, quarterly auctions, or from other market participants. The increasing floor price and decreasing number of allowances are meant to encourage investments in cleaner fuels and technologies and more efficient energy use.

The price of allowances had been rising gradually since February 2023. Post-pandemic economic recovery increased industrial activity and demand for allowances. Expectations of stricter future regulations and fewer available allowances pushed prices up. There has also been a growing commitment to reducing emissions among market participants.

CARB is working on amending the Cap-and-Trade regulations, causing uncertainty about the future value of the allowances. California’s goal of reducing greenhouse gas emissions by 2045 requires CARB to issue fewer allowances, but updates have been delayed. There is also uncertainty about possible linkage with Washington State’s carbon market.