Record high prices forecast in the US while the EU struggles: March Carbon Markets Update

The two US carbon markets are swiftly catching up to their European counterpart, one of the most advanced schemes since the 2000s. 

While California’s mandatory carbon price (CCAs) traded relatively flat in the secondary market in February, the scheme’s first quarterly joint auction held together with Quebec this year witnessed a full clearance of both current and advance auction allowances, which has been the case since November 2020. The current and advance auction settlement prices rose further to US$41.76 and US$41 respectively, up over 7% and 9% compared to the previous batch of auction in November 2023.

Chart 1: California Cap-and-trade Program Auction Prices


Source: Bloomberg as at 29 February 2024

The Regional Greenhouse Gas Initiative (RGGIs) is also due to have its first quarterly auction in mid March, with market participants expecting record high auction prices. That said, overall price action in the compliance carbon credit market was subdued in February.

The European carbon allowance price (EUAs) are yet to find a bottom ever since February 2023 when it hit a record high of over €100/Mt. The contract ended the month at €56/Mt in the secondary futures market following a trough of €52.2/Mt during the month. The weather condition in Europe remains mild, dampening the demand for power and as a result, for carbon credits. BloombergNEF now estimates the average EUA price to be around €62.6/Mt for 2024. Some of the catalysts investors are looking for include the imminent rate cuts in the second half of 2024 and the potential recovery of the macroeconomic outlook. Over the longer term, after the REPowerEU initiative in the region that frontloads carbon credit sales in order to reduce reliance on the Russia oil, the market is expected to see at least 250 million fewer permits available after 2026.

Chart 2: Global carbon markets performance in AUD

Source: Bloomberg as at 29 February 2024

Abbreviation used: EUA = EU emission allowance futures; UKA = UK emission allowance futures; RGGI = Regional Greenhouse Gas Initiative; CCA = California Carbon Allowance.

ASX investors can gain exposure to global carbon markets via the VanEck Global Carbon Credits ETF (Synthetic) (XCO2).