Weekly Posts

Climate Week Wraps as California Moves to Tighten Market Despite Inflation

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Another Climate Week NYC is in the books. The city was buzzing with delegates, investors, and activists targeting climate solutions and bringing the world's capital markets into the fray. We spoke at two major events, the S&P Sustainable1 event held by the Nest Summit Campus at the Javits Center and the Sustainable Investment Forum at the Ziegfeld Ballroom. Both events highlighted the need for urgent action across asset classes and, most importantly, that government policy needs to be accelerated. As you can imagine, global carbon markets were central to these discussions as they represent the perfect marriage of regulation and capital markets.

This week was also momentous in terms of broad market volatility, and carbon markets were not immune.


While most global markets were in the red this week, including the California carbon market, one positive development came from comments from an Air Resources Board (ARB) official that the state would move to tighten the market to meet the new 2030 target of a 50% cut in emissions, up from the previous 40%. ARB is in now the process of drawing up its new Scoping Plan for the period to 2030 and has so far modeled a maximum 47% cut in emissions.

Raising the target, coupled with several recently passed climate bills, reinforces the state’s adherence to increasing the ambition of its climate mitigation efforts. Tightening emission targets is constructive for the market's long-term price growth. We will see allowance supply shrinking as industries work to keep pace with the new parameters.

For more clarity on this shift, Bloomberg New Energy Finance (BNEF) recently released new supply estimates that expect the market to enter a deficit by the end of the decade. According to BNEF, California’s market will see a surplus of allowance between 2022 and 2026 but will move into a deficit afterward. The analysis estimated that the supply of CCAs will total 2.5 billion tonnes between 2022 and 2030, while aggregate demand will exceed that by 1.5 million tonnes by the end of 2030.


Unlike California, BNEF analysis suggested that the RGGI market will be short of around 8 million allowances in 2022 after recording a surplus of 87 million RGAs in 2021.

The analysts estimated that if power generators maintain a steady hedging ratio of 50% for the year ahead and a combined 50% for the following two years, demand will total 32 million RGAs and maintain a tight market between 2021 and 2026. However, BNEF added, by the end of the decade, permit supply will exceed demand by around 45 million allowances unless the market parameters are adjusted.

RGGI's program review deadline is currently set for December 2023, which means changes to the program will likely take effect starting in 2025. We will keep watch of any updates to the RGGI program as they're announced.


While EUA volatility is heating up today, we will provide an in-depth update next week once the dust settles.

Last week we wrote an update on the recent EU energy reform proposals. We noted that EUA prices bounced back after the wider energy market took a positive view of Europe’s efforts to secure energy supplies for the winter, which may alleviate pressure on industrials to cut output to save gas and thereby support demand for EUAs. Click here to read more.