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A month ago the California carbon market was in a free fall, but there is already evidence prices will quickly return to normal

Published: April 20, 2020 by Editorial Team

It was only a month ago that I wrote a post (link below) about the precipitous drop in the price for allowances and offsets in the California compliance market. That piece offered my take on what was behind the drop and how certain design features set the market up to recover relatively quickly. The unsettling questions at that time were, when would we hit the bottom and when would prices start increasing again?

I never would have been brazen enough to write it would only be a matter of days as the answer to each of those questions. However, a graph of pricing data shows a very distinct V shape, which is indicative of a rapid recovery. It has only been about two and a half weeks, but in that time allowance prices in the secondary market have increased by 30%. They bottomed out at nearly five dollars below the state auction price floor, but are currently about $1.25 below the floor price.

Although allowances in the secondary market and offsets don’t have a price floor, the auction price floor is an important market metric. As allowance prices drop in the secondary market, there is a strong incentive for emitters to buy those allowances, as opposed to waiting for the quarterly auction. The quick rebound in allowance prices over the past two and half weeks is indicative that this is what’s been happening.

With the next allowance auction coming in May, the expectation is that secondary prices will continue to stabilize towards the price floor. This is occurring despite the decline in emissions resulting from California’s shelter in place order. With California’s apparent success in flattening the curve, it is now turning its attention towards gradually re-opening its economy.  It appears the worst in the market is behind us.