US west coast carbon markets are watching regulators closely going into 2024, following a year of fits and starts in Washington state and a new pivot to prepare for potentially higher-than-anticipated future costs in California's cap-and-trade program.
California Carbon Allowance (CCA) prices rose by more than 30pc over the course of 2023, egged on by a series of workshops in the market's regulatory process and speculator activity as the state and Quebec consider setting more-stringent greenhouse gas (GHG) emissions targets within their Western Climate Initiative (WCI) market starting in 2025.
The California Air Resources Board (CARB) may move its program's mandate from the current target of a 40pc reduction in GHG emissions from 1990 levels by 2030 to a new target, a 48pc or 55pc reduction, and make a corresponding reduction to future allowance pools.
At the same time, Quebec is mulling removing 17mn allowances from its program, which correspond to the number of carbon offsets that have been used to meet past compliance obligations, to promote future GHG reductions as the province exceeded its emissions cap for the fifth consecutive year in 2022.
Spurred by anticipation around these and other changes, and their potential to significantly raise future allowance prices and reduce supply, the California market has remained bullish and could remain so into 2024. The CCA market has already set a series of record highs in the closing weeks of the year. Allowances for December 2023 delivery climbed above $39/metric tonne (t) and the December 2024 contract rose to more than $42/t.
CARB has indicated that it intends to have its program amendments finalized by the second half of 2024, with Quebec expecting a similar timeline.
New market, new challenges
The new kid on the block, Washington state, experienced growing pains and trials in the first year of its cap-and-trade system.
While regulators in January predicted auction prices of less than $33/t, those expectations quickly proved to be overly optimistic. The first of the four auctions easily exceeded that initial expectation, clearing at $48.50/t, while two othes cleared above $50/t and another above $63/t. The clearing prices at two auctions were high enough to trigger allowance cost containment reserve (APCR) auctions to provide compliance entities with more allowances.
In the secondary market, Washington Carbon Allowances (WCAs) have remained above $50/t since March. Argus assessed WCAs for December 2023 delivery at $52/t on 26 December.
Regulators hope that linking with the larger California-Quebec market will lower costs because of access to the larger pool of allowances, while also ensuring the future stability and durability of the state's market, which the Department of Ecology's (Ecology) initial analysis suggests may not be likely if Washington remains a standalone market.
As a step toward linkage, Ecology soon will submit its agency request legislation to the state legislature, which begins its session on 8 January, to amend the Climate Commitment Act to better align parts of Washington's program with the WCI market.
In the meantime, Ecology has moved to increase potential new allowance supplies to put downward pressure on compliance costs. Its reallocation of allowances in the APCR budget created a larger pool of 8.9mn allowances that will be available next year.
But many of Ecology's decisions in 2023 have been criticized by both market observers and participants because of their unexpected appearance throughout the first year of Washington's program. These sudden shifts have made some market participants wary of the program, leading to less activity and lower volumes, and raised concerns about the state's chances of linking with California and Quebec.
The state's efforts are necessary to prevent industries from leaving the state for areas with less-stringent or no GHG requirements, said Joey Hoekstra, an analyst with the International Emissions Trading Association (IETA). But Ecology can do a better job communicating its intentions to the market.
"There needs to be significant lead-up to this, because it is very important that industry be able to adjust their strategy," Hoekstra said.
Planned changes to the program in 2024 could face some obstacles as some lawmakers intend to pursue separate legislation to amend the climate law and reduce costs associated with the cap-and-trade program. In addition, program opponents are trying to get an initiative on the November ballot to repeal the cap-and-trade-program, which could mire any efforts by Ecology and the legislature to amend the program.
