Newsom Budget Talks Include CCA Program Extension

On Wednesday, Governor Newsom announced a proposed 15-year extension of California’s signature cap-and-trade program as part of his revised budget plans. CCAs jumped as high as $28.88 but reversed to end the day relatively unchanged. The extension is one of the main focus areas for the market right now, alongside the ongoing program reform. Newsom's support is a positive development, though we are still awaiting further details and formal approval of the extension. The market is looking toward the auction next Wednesday. It's important to remember that even if prices remain muted at the auction, it's just one data point. Auctions tend to shoot a little low as traders enjoy getting short futures and low calling the auction to try and lock in a spread. For that reason, we don’t put a huge focus on the auction price. We view the futures as a better indicator for market expectations. CCAs are currently at highly attractive levels near the floor, where we are seeing increased investor interest as the two major catalysts develop further.

EUA Momentum

European carbon prices are again testing the upper bounds of the range they’ve occupied since March, with prices bumping up against the €74.00/tonne mark, as US tariffs against some nations start to be rolled back and macroeconomic signals continue to paint a slowly improving picture.

December 2025 EUA futures have rallied by 23% since falling to a low of €60.07/tonne on April 9, and some analysts are now forecasting that prices have a higher chance of reaching €80.00/tonne than they do of falling back to €60.00/tonne.

Analysts at Macquarie are forecasting a 38 million-tone deficit in EUA annual supply this year, boosted primarily by an increase in fossil fuel power generation. They also continue to predict a big annual deficit in allowance supply next year as the front-loading of auctions under REPowerEU comes to an end.

“The deficit is supply-driven, and while there are some risks, particularly around free allocation, the size of the deficit makes it difficult to envision a scenario where this does not materialize under current ETS settings.”

The bank increased its 2026 EUA price forecast to €95.00/tonne.

Macquarie also forecasts that the historical correlation between the European TTF natural gas benchmark and EUA prices will break down. “A tight carbon balance in 2026 may coincide with a relatively loose gas market”, they wrote this week, reflecting Europe’s efforts to ensure storage is 90% full before the onset of the winter season.

All Eyes on the UK-EU Summit

Across the channel, the recent rally in UK ETS prices has come to a halt ahead of the critically important UK-EU summit, at which leaders will discuss linking the two markets.

December 2025 UKA futures prices had rallied by more than 70% since the start of the year, fuelled by speculative buying from investment funds betting that the UK would move quickly to link its ETS with the European market, thereby avoiding the threat of the EU’s CBAM import levy.

Funds had amassed their largest-ever net long position at the end of last week, but a 13% plunge in prices this week suggested that some had begun to doubt whether linking is an immediate prospect.

In fact, analysts and traders have been at pains to downplay the likelihood of a commitment to swiftly bring the two emissions trading systems together. Most market participants expect strong support in principle for linking but no commitment to a definite timeline.

The five years since the UK ETS launched have seen the British market start to diverge fairly significantly from the EU system in terms of coverage, price and supply management, and overall ambition. This means that any decision to link the two markets will require a considerable adjustment, most likely on the part of the UK, whose market is just 10% the size of the EU.

Furthermore, the EU ETS is subject to the legal oversight of the European Court of Justice, and this has been a ‘red line’ for UK politicians since Brexit. It’s true, however, that the EU and Swiss emissions markets have managed to link without the ECJ being involved, and this offers one workaround.

One important obstacle may be pending trade discussions. After President Trump and UK Prime Minister Sir Keir Starmer reached a limited trade agreement earlier this month, the UK may be wary of committing itself too closely to the EU for fear of jeopardizing its transatlantic connection.

It’s also worth bearing in mind that the EU-UK summit agenda extends far beyond just the carbon market linkup, and other areas such as free movement are likely to prove much more difficult to resolve, threatening a wider agreement.

Carbon Market Roundup

The weighted global price of carbon is $53.97, up 1.4% week over week. EUAs are up 3.8% at €73.41. UKAs are up 4.2% at £48.66. CCAs ended down 0.6% at $27.75. RGGI was down 0.4% at $21.96. WCAs closed at $60.00, up 0.76% for the week.