US carbon markets set for record year

US carbon exchanges will easily hit record volumes this year, in part because of recent record highs but also due to new entrants into the market.

There is a lot more managed money coming into the carbon exchange space and more interest from all corners of investment, said Nathan Clark, managing director of financial product developer IncubEx, at the Argus North American Biofuels, LCFS & Carbon Markets Summit in Napa, California.

"I think we're only seeing the very, very beginnings of this sort of rush," Clark said.

The California carbon market has seen most of the influx of new financial players and investment as there is more liquidity compared with the Regional Greenhouse Gas Initiative (RGGI) carbon market in the northeastern US.

"It's just kind of a perfect storm for investment," said Mike Taylor, president of Emission Advisors, although there have been dramatic movements in both markets.

RGGI could experience a significant price increase if the same number of entrants went into the cap-and-trade program in the US northeast, he said.

Over the last 12 months, Taylor has seen about 43 new general accounts open in California and about half that in RGGI. The growth of people trying to get into the space is "astronomical."

"Most of the compliance entities, especially the ones that don't have a trading desk, trading firm or even a trader, have been very slow to react and kind of been shell shocked the last six months," Taylor said.

Compliance markets like RGGI have been preparing for the entry of Pennsylvania into the 11-member program. Pennsylvania's membership would mean a major expansion for the program with an initial proposed CO2 cap for the state's power plants of 78mn st for next year, which would taper off to around 58mn st in 2030, a 25pc reduction from 2022. This year's RGGI CO2 budget is 119.8mn st, decreasing to 116mn st in 2022.

RGGI allowances for December 2021 delivery have continued to clear previous market highs over the last two weeks. Argus yesterday assessed RGGI allowances at $11.85/short ton, a new record.

Argus assessed California Carbon Allowances (CCAs) for December 2021 delivery at a high of $29.12 on 5 October, although allowances fell after hitting the peak and have tried to regain some ground in recent weeks.

By Julia Martinez