Key Takeaways

1. Last winter saw unprecedented growth in investor interest in the WCI market.
2. By comparison, new investor interest has significantly dropped off in Q2 2022.
3. Holding limits may restrain future participation by longer-standing financial entities.

The end of 2021 and beginning of 2022 saw unprecedented new interest from financial entities in the WCI Cap and Trade market. However, as uncertainty stemming from high inflation rates and fears of recession have dominated recent financial dialogues, many wonder how significantly momentum in the WCI market has ebbed. In the wake of the August 17, 2022 WCI Joint Auction #32, we look for indications from the CITSS registry to understand investor interest.

Trajectory of Investor Interest 2020 – 2022

The Compliance Instrument Tracking System Service (CITSS) registry tracks all WCI market entities, both compliance and financial. In the past several years, as investor interest in the CA Cap and Trade system has grown, a large portion of new CITSS registrants have been financial entities. Through most of 2020 and 2021 new investor registration was relatively stable, with an average of 4.5 new entities joining every quarter. In Q4 of 2021 and Q1 of 2022 this interest accelerated rapidly, seeing the addition of 22 new entities in half a year. Many looked at these developments as a sign of increased adoption and market maturity for the largest carbon market in the Western hemisphere. However, recent CITSS registration data shows this may not be the case.

Analysis: Investor Appetite in Q2

In the midst of economic contraction, Q2 of 2022 saw only 3 new financial entities register for participation. Such a marked drop is a strong indication that rising interest rates have decreased liquidity for financial players, and as a result, they are unable or unwilling to open new positions. In the context of this slump, it is also important to take into account that many older financial entities have hit their holding limits and may play a more limited role in the future. This adds significance to new investor registration, as these are the accounts that will predominantly drive financial purchases going forward.

The prevailing “gloomy” market picture may curtail further financial expansion into compliance markets for the time being. However, recent announcements by CA Governor Newsom that seek to increase 2030 ambitions for CA carbon reductions from 40% up to 55% are keeping CA and the WCI in the spotlight. There are doubts that the Governor’s proposals will clear legislative hurdles before the end of the month, however, an executive order is not out of the question. Other legislation, such as Senate Bill 1391, is also in play. All told, the legislative outlook presents potentially significant upside and tailwinds for price increases for financial entities. In that sense, at least in the WCI market, the picture for investors may not be as bleak as it appears.

Analyst Contact: 

• Craig Rocha (cmrocha@ckinetics.com)
• Gabriel Stoltzfus (gstoltzfus@ckinetics.com)