Research

The California carbon market has been a star performer, garnering growing attention from financial players. For the last five years, from 2019 through 2023, California carbon allowances (CCAs) appreciated 13.6% per annum. This great run was interrupted in 2024, with CCAs declining from $42 at the beginning of the year to $36 at the end of September. 1 While many factors may explain underperformance, we focus on what we think has been a major contributor:

The Carbon Border Adjustment Mechanism (CBAM) is poised to be one of the most transformative regulatory initiatives in the global carbon market, reshaping not only the EU Emissions Trading System (EU ETS) but also influencing carbon markets worldwide.

Supply and demand dynamics play a pivotal role in determining price direction in various markets, and carbon allowance markets, which are an integral part of the Emission Trading Systems (ETS), are no exception. However, there are specific elements of supply and demand that are unique to carbon markets, as we discuss in this paper:

In recent years, the world has experienced unprecedented climate events. September 2023 was the warmest September on record, reaching 1.44°C (2.59°F) above the 20th century average temperature. In the same month, we witnessed an unprecedented amount of rain and floods, which caused devastation in New York, Brazil, Libya, and Hong Kong. While no specific event can be directly attributable to global warming, these events highlight the urgency and importance of coordinated action to address climate change.

Over the last few years, exposure to carbon as an asset class has become a common component in investor portfolios. Investors thinking of adding carbon exposure to their portfolios will inevitably have to decide how to allocate that exposure across regional carbon allowance markets. This paper discusses investment considerations that should go into this decision, focusing on the pitfalls of concentrated portfolios and the benefits of diversification.

In the discussions of carbon allowance future price trajectories, the cost of abatement technologies often comes up as a fundamental factor that may set a "ceiling" on European Union allowance (EUA) prices. In other words, if the carbon allowances reach the abatement cost levels..