California carbon price to lead growth

European carbon prices rebounded despite short-term headwinds, the UK introduced it's own Carbon Border Adjustment Mechanism (CBAM) and California’s market concluded a stellar 2023. Review recent developments across carbon markets.
European carbon prices (EUAs) bounced back the most in December, returning over 6% (in Australian dollar terms). The EUA December 24 futures ended at €80.37/Mt on the last trading day in 2023, after reaching a record high level of over €100/Mt in February in the year. Some of the short-term headwinds in the bloc includes normalisation of natural gas prices which are inversely related to carbon prices. Emitters in this case would switch to gas which is less emission intensive from oil.

While volatility may remain in 2024 in the European carbon market, the regulators will be on the lookout for the oversupply of allowances. One imminent action is to review the distribution of free allowances in the industrials and aviation sector for the upcoming allowance allocation period from 2026 to 2030, ultimately addressing the legacy issue of overallocation in these protected sectors moving forward.

The UK Emissions Trading Scheme (ETS), followed the steps of EU ETS to set up its own version of Carbon Border Adjustment Mechanism (CBAM) in December 20231. The mechanism is set such that carbon leakage (i.e., moving the manufacturing capacity from one jurisdiction to another due to different carbon price levels) are prevented, while pushing for acceleration of global decarbonisation efforts. Once implemented, foreign producers would need to pay for the price differential between the UK carbon allowance price and the carbon prices in that jurisdiction for the carbon emissions produced in certain sectors.  

Source: GOV.UK

On the other hand, California’s carbon price (CCAs) had a stellar year with over 30% growth in 2023. The record-high carbon price has been primarily driven by the State’s strong climate ambitions. Following the emission reduction scenario analysis done by the California Air Resources Board (CARB) in November, Bloomberg NEF now estimates that the price could climb to US$93/Mt 2030 in the 48% emissions cut scenario2.

December performance in local currencies:

Source: Bloomberg. Past performance is not indicative of future performance.

December performance in AUD:

Source: Bloomberg. Past performance is not indicative of future performance.

Key risks: An investment in the XCO2 carries risks associated with: ASX trading time differences, market risk, concentration risk, futures strategy risk, cap and trade risk, currency risk, political, regulatory and tax risks, fund operations and tracking an index. See the PDS for details.

Any views expressed are opinions of the author at the time of writing and is not a recommendation to act.

1GOV.UK. Consultation outcome factsheet: UK Carbon Border Adjustment Mechanism

2BloombergNEF. California Reforms Could Double Carbon Price By 2030.

Published: 17 January 2024

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