California Air Resources Board (CARB), the CCA market regulator, held its latest public workshop on Wednesday to provide an update on potential amendments to the state’s cap and trade program to align the market with the state's more ambitious emissions reduction targets.

CARB introduced two new alternative cap trajectories out to 2045 that are consistent with the 48% emissions reduction target by 2030 and the 85% reduction target by 2045. These new scenarios aim to address concerns around the discontinuity from CARB's previously presented Standardized Regulatory Impact Assessment (SRIA) scenario from last quarter.

The main surprise from the meeting is the one-year delay in implementing the program amendments, as the rulemaking process is taking longer than anticipated. The cap adjustment is now expected to start in 2026 rather than early/mid-2025.

Despite the delayed timeline, the new scenarios still show an aggressive supply cut. CARB also clarified that the allowances cap adjustments would be made by reducing free allocations and auction volume, which is more supportive of faster price appreciation than if they took from the price containment reserves.

CARB pointed out that despite their different paths, the two new alternative options (as well as the SRIA analysis) encompass the same cumulative allowance budgets to achieve the 2045 goal. Option 1 means a smoother decline into 2030, whereas Option 2 would be a more accelerated tightening into 2030, but its cap plateaus between 2030-36 and is followed by a linear decline into 2045.

• Option 1 – 2026-2030: Removes 180 million allowances (10% cap adjustment factor); Post-2030: Linear decrease to 2045 target.
• Option 2 – 2026-2030: Removes 265 million allowances (14% cap adjustment factor); Post-2030: Remains at 2030 budget through 2036 then decreases to 2045 target.

Comparatively, the SRIA trajectory shows a cut of 265 million permits from 2025 to 2030 to bring the cap in line with the current 2030 goal. This would be followed by an increase in market supply in 2031-2033 before the supply resumed its downward path to reach 173 million tonnes in 2030.

Additionally, revisions to the liquidity reserve tiers and ceiling trigger prices to align with the new budget scenario are still up for discussion.  For context, a certain number of allowances from the cap is set aside each year into an Allowance Price Containment Reserve (APCR). The APCR has two liquidity tiers at different price levels, so if the CCA price hits above a tier level, more supply is released into the market. These tiers act as "speed bumps" to help stabilize the market and prevent prices from rising too quickly. The market design also includes a price ceiling where CARB may offer an annual price ceiling sale if no allowances remain in the reserve.

CARB also noted that between 2012 and 2017, annual emissions were an average of 13.7 million tonnes lower than predicted. Consequently, they are adjusting the starting point for its emissions trajectory from 2021 to 2030, and this will require an adjustment to market supply for the remaining years of the decade. The state’s current 2030 emissions target is 173 million tonnes of CO2, while the 2045 target is set at 30.3 million tonnes.

The market initially jumped to a high of $39 on the release of the slide deck Tuesday. However, the rally was short-lived as participants further read through the presentation, with the delay in implementing the cap adjustment becoming a major focus. CCAs saw a slight recovery yesterday, though met resistance at $37, closing lower at $36.25. Regardless of the exact trajectory chosen, CARB's long-term commitment to pursue significant tightening sends bullish signals for the market. We also expect the market will continue to demand more tightening from CARB in the future.

Carbon Market Roundup

The weighted global price of carbon is $51.33, down 3.1% from the previous week. EUAs decreased by 1.5 % to €69.33, while UKAs decreased by 9.4% to £41.08. CCAs declined 5.6% to $36.05. RGGI ended at $24.78, up 4.4% from the prior week.

The full workshop presentation can be viewed here.