California Carbon: Policy, Positioning, Performance

2025-03-14 23:00:00 ET

Summary

• California carbon allowance prices currently trade around $30.50.
• The strong CCA investment thesis has been in place for some time but is increasingly interesting today as prices have returned toward the floor.
• The recent weakness we have seen was due to the reform policy implementation being pushed back by a year.

Some of the most compelling opportunities lie just outside the periphery of many traditional portfolios. We believe this is the case for the $73 billion California carbon market, which has seen trading volume grow nearly 250% in the last five years. ¹ California carbon allowance (CCA) prices currently trade around $30.50. ² Comparatively, the auction reserve floor price of $25.87 is just 15% lower than the current spot price and can significantly limit the downside. This floor price increases annually by 5% plus inflation, ³ meaning it will rise above today’s current levels within 3 years. The market’s upper-bound mechanism, the price ceiling, stands at $94 today and rises by that same inflation-adjusted rate to reach roughly $134 by 2030. ⁴ These inherent market dynamics present the California carbon opportunity in its simplest terms. The price floor limits the potential downside, while the upside is growing with the consistently increasing upper-bound levels....

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