Oregon and Washington state have entered the carbon market party on the US west coast, following a year in which economic concerns and state policy drove volatility in allowance prices.
While most California participants still expect the market to remain bullish in the long-term, particularly with lawmakers and regulators potentially making changes to the cap-and-trade program in 2023, predictions of a global economic downturn have reversed many of the record price increases of 2022.
Up and down — and up
California Carbon Allowances (CCAs) have fallen over the course of 2022.
Argus assessed CCAs for December 2022 delivery at $34.60/metric tonne on 3 January. They plummeted below the $25/t mark in March following the onset of the Russia-Ukraine conflict, before rebounding and hovering above the $30/t mark until June. Since then, CCAs have slowly declined for the remainder of the year, with steeper drops after the August and November CCA auctions settled at declining clearing prices. The market has rebounded again heading into the year-end holidays. Argus last assessed CCAs for December 2022 delivery at $28.45/t.
Prior to the August auction, CCAs climbed above $32/t in response to governor Gavin Newsom's (D) climate policy proposals for the end of the 2022 legislative session, particularly his call for increasing the state's 20230 GHG-reduction mandate from 40pc to 55pc below 1990 levels. But that was one of his few proposals not to become law in 2022.
California lawmakers have reintroduced the 2030 bill for the 2023-24 session, which is scheduled to begin on 4 January.
California recently finalized its next scoping plan, which could lead to changes that impact the market. The California Air Resources Board said it will report to the state legislature by the end of 2023 on the status of the cap-and-trade program's allowance supply with any suggestions on changes needed to accelerate targets for 2030 to reach carbon neutrality by 2045.
Welcome to the neighborhood
Up north, Washington state will launch its cap-and-trade program in January, with the first auction expected in the second half of February.
A smattering of trade has already taken place in the new market, with Argus last assessing Washington Carbon Allowances (WCAs) at $40/t.
The program largely mirrors California's with a design that could facilitate an eventual linkage with the Western Climate Initiative (WCI) carbon market, which includes California and Quebec.
But when that linkage will occur remains to be seen and could take a few years, even with Washington regulators deciding to accelerate their stakeholder process after an economic analysis found that joining the WCI market could significantly lower compliance costs for companies in the state. The analysis forecasts that WCA prices will start at $41/metric tonne next year if linkage with the WCI carbon market is expected among market participants.
A recent International Emissions Trading Association survey found that 36pc of members expect the linkage by 2025 and 36pc expect it after 2025.
Washington regulators have said they are considering future rulemakings to further develop the state's carbon market, although they have not yet finalized a schedule of topics to address. Potential rulemakings could cover limits on offset usage for facilities that adversely harm environmental justice communities, Washington-specific offset protocols and requirements for biofuel emissions to be exempted.
Oregon launched its own cap-and-trade program at the start of 2022. But its program is much different than its neighbors', largely because it came about through executive rather than legislative action.
While the narrow victory of Tina Kotek (D) over Christine Drazan (R) in the November Oregon gubernatorial election closed off the possibility of a hostile executive branch axing the new carbon market, the program still faces legal challenges. Industry groups and natural gas utilities have filed three separate lawsuits challenging Oregon Department of Environmental Quality's (DEQ) authority to create the program.
DEQ wrote the regulations at the behest of Kotek's predecessor, governor Kate Brown (D), after Republicans including Drazan left the Capitol in 2019 and 2020 to deny Democrats a chance to pass cap-and-trade legislation.
That may be harder to do in the future. Voters in November overwhelmingly backed a ballot initiative that would bar lawmakers from running for re-election if they have more than 10 unexcused absences from a legislative session.
