The state we're in

Welcome to Carbon Risk — helping investors navigate 'The Currency of Decarbonisation'! 🏭.

Twelve months ago, at a White House signing event, President Trump sat in front of a group of miners in hard hats, declaring that he would slash “unnecessary regulations that targeted the beautiful, clean coal.” The source of his ire, state laws that curb the consumption of fossil fuels. The executive order signed by Trump that day was never likely to be successful, and indeed, the threat never came to pass.

Today, looking back at the past year, its clear that states with progressive climate policies have become more preoccupied with issues of affordability, irrespective of the threat posed by Trump. We begin by looking at developments in the main carbon markets: starting with California, the Regional Greenhouse Gas Initiative (RGGI), and finishing with Washington State (see "Affordability" narrative weighs on California's carbon market: A 'Blue Wave' may need a greyer shade of green in the Golden State).

As this article demonstrates, not everyone has taken the same approach. Previous climate policy leaders have sought to row back on climate commitments, or otherwise seek to manage their carbon price lower. Meanwhile, other states not considered to be as ambitious, have embraced carbon pricing as a means to deal, not just climate change and adaptation, but also as a means by which they can tackle affordability concerns.

Finally, we end with a paradox (or two). For while (and perhaps surprisingly) American concerns about climate change are higher than ever, but their willingness to adopt the polluter-pays-principle is lower than ever, especially when individuals are being asked to cough up. At the core of this is another paradox, a "climate policy paradox", one where voters reject the tools that economists advocate the most, in a mistaken belief that they cost more than the alternatives.

Lets dive in.

CARB pivots to supporting investment using free allowances, risks nullifying the carbon price

The California Air Resource Board (CARB) has just published a modified version of its Initial Statement of Reason (ISOR), the document which outlines the rationale for amending its Cap-and-Invest regulations.

The modified ISOR provides further detail as to how the Manufacturing Decarbonisation Incentive (MDI) will work. In line with policymaking discussions in Europe, CARB want the carbon market to act as a more effective vehicle for industrial decarbonisation, while also minimising carbon leakage (see Cap-and-Invest: Europe set to leverage its carbon markets to boost investment in decarbonisation).

The MDI is CARBs answer to this challenge, providing additional free allowances to facilities if they invest in certain emission reduction activities. Examples of eligible decarbonisation projects include CCUS, purchasing biomass-derived fuels, investing in electrification, procuring low-carbon hydrogen, and other activities that reduce production emissions.

The modified ISOR now indicates that 118.3 million allowances (CCAs) will be diverted from the 2027-30 budget years to a "Build Up California Reserve" account - up from an estimated 40 million CCAs outlined in the original ISOR. About half of the CCAs are available to be used by the states refiners, with the rest eligible for non-refiners (see California's 'energy transition' will not be linear).

But perhaps the most important factor from a market perspective is the source of these CCAs. CARB are proposing that the 118.3 million CCA cap adjustment (previously thought to be retired from the market and representing a significant tightening of the market) could now make their way back onto the market.