North American Carbon Markets Making A Name For Themselves

1/26/2019

CHICAGO

Dan Scarbrough, President and COO, IncubEx

As the European Union’s Emissions Trading Scheme market showed last year, carbon markets are drawing greater interest by a wide range of market participants. Such is also the case for North American carbon markets, which are making a compelling case of their own.

The US carbon market consists of state and regional markets in the United States. Both were extended to 2030, to match the EU ETS mandate and also poised to add more partner states to their rosters for carbon.

It is with this backdrop that IncubEx and Nodal Exchange listed the first tranche of carbon and renewable energy credit futures for North America on November 16, 2018. The new contracts marked the expansion of Nodal Exchange’s products into environmental markets with futures and options on: California Carbon Allowances, Regional Greenhouse Gas Initiative Allowances (RGGI), New Jersey Solar Renewable Energy Certificates, PJM Tri-Qualified Renewable Energy Certificates and 11 other emissions and renewable contracts. More contracts are being developed by IncubEx and are expected to be launched in 2019.

In the first two months since the launch, the North American carbon and REC futures on Nodal generated a combined open interest of more than 10,000 contracts by the end of January.

It was an interesting year for several of the US carbon and REC markets. RGGI’s carbon futures prices ranged from a low of $3.90 to a high of $5.55, a notable high price in recent years. California’s carbon prices remained in a tight range of $14.99 to $15.65. Meanwhile, the most liquid REC markets also showed varied price ranges on front-month vintages, with New Jersey Solar ranging from $207.25 to $243.51 in 2018, and PJM Tri-Qualified RECs ranging from $5.05 to $8.04 during the year.

There is good reason for optimism about the US markets in the coming months as well. California’s carbon cap-and-trade program was extended to 2030 and the California Air Resources Board added several amendments in December 2018 with a price ceiling on allowances and a reduction on the number of carbon offsets allowed after 2020. California’s carbon market is part of the Western Climate Initiative and is currently linked to Quebec, and it may also be expanding. There appears to be interest from Washington state and perhaps Oregon as well.

In the Northeast, RGGI was also extended to 2030, matching California and the EU market. That certainty has led to renewed interest. In late 2018, New Jersey announced it was rejoining RGGI in 2020. New Jersey was one of the original 10 member states, but pulled out in 2012. Virginia appears ready to join in some capacity, plus there are some initial moves in Pennsylvania to join RGGI.  

Separately, a new cap-and-trade market also was announced in December 2018 by the Transportation and Climate Initiative (TCI) which includes nine US Northeast states: Connecticut, Delaware, Maryland, Massachusetts, New Jersey, Pennsylvania, Rhode Island, Vermont, Virginia and Washington, DC.  It is very early days for the concept, and TCI aims to complete its full proposal by the end of the year.

In short, the US state and regional markets have political momentum and are on the path to grow their bases. With key foundations for the markets in place, 2019 may be another strong year as well.