Pessimism on Regulatory Action Dampening North American Carbon Market Prices, Even as Fundamentals Remain Strong

Key Takeaways

• cCarbon analysts presented their annual outlook on North American and European carbon markets highlighting demand-supply and pricing outlooks for key markets.
• Rule-making underway/ planned in WCI, RGGI and Alberta TIER are key drivers for North America in the coming quarters. Developments on EU-UK linkage will impact the UK ETS.
• A poll of market participants showed that most expected a continued delay in rule-making in WCI and expected delay in Washington linkage.

Modeling Updates and Insights

Despite strong fundamentals in North American carbon markets, regulatory uncertainty and unexpected market shifts have weighed on prices, according to cCarbon’s annual outlook presented at the Great Expectations Webinar. Analysts highlighted demand-supply trends, pricing projections, and key surprises from 2024 that will shape expectations for 2025 and beyond.

The webinar held on February 13^th, was the second part of a 3-part series covering fuel markets (Covered on Jan 30^th) and the Offsets market (to be covered on Feb 18^th and March 11^th). Members can access past recordings at NA CFS Interplay and Pricing Outlook 2030 and Great Expectations: What to Watch in Carbon Markets in 2025.

Market Surprises in 2024: A Mixed Picture

While long-term fundamentals remain robust, 2024 saw several unexpected market developments that reshaped expectations:

WCI: Regulatory Uncertainty Dampens Prices Amid Renewable Diesel Growth

The California-Quebec WCI market saw weaker-than-expected carbon prices in 2024, as delays in ISOR rule-making, in the context of a reduced bank, and linkage with WA, created a cloud of uncertainty. Despite strong long-term fundamentals, the absence of clear policy direction weighed on market sentiment, keeping prices below earlier projections. Meanwhile, the rapid adoption of renewable diesel significantly reduced transportation emissions, outpacing forecasts and altering demand for allowances.

We conducted a poll on the expected release of CARB’s 45-Day ISOR Package, with 44% of respondents indicating they believe it will be released this summer.

Washington’s Carbon Market: Structural Deficit Intensifies Price Risks

Washington’s carbon market is potentially grappling with a deep deficit. Current cumulative obligations are potentially exceeding available allowances by upto 24 million, based on data released by Ecology in December 2024. That shortfall is likely to potentially drive prices up toward the Allowance Price Containment Reserve (APCR) level in 2025. Potential delays in linkage with WCI also remain a concern.

We conducted a poll on when Washington’s linkage with WCI is expected to take effect, with 54% of respondents voting for the year 2027.

RGGI: Rising Emissions Shift Market Expectations

Contrary to expectations, emissions under the Regional Greenhouse Gas Initiative (RGGI) increased in 2024. While continued decarbonization remains a goal, delays in the program review and uncertainties surrounding offshore wind expansion have created hesitancy. With state-level policies still evolving, participants are closely watching for regulatory clarity that could shift supply-demand dynamics.

Oregon CPP: Building on the Past

2025 is the first year of the revised Oregon Climate Protection Program (CPP), with natural gas utilities, fuel suppliers, and industrial emitters. Unlike other cap-and-trade programs, allowances are allocated rather than auctioned, while Community Climate Investment credits provide an alternative compliance pathway. cCarbon shared its CabonOutlook model for Oregon for the newest addition to the West Coast carbon landscape.

Alberta TIER: Credit Usage Increased While CCUS Struggles to Scale

The Alberta TIER market experienced a record surge in Offset and Emission Performance Credit (EPC) usage as compliance obligations remained relatively flat. However, CCUS deployment struggled, with only a fraction of the expected capacity coming online. As compliance thresholds tighten, demand for credits is expected to rise, but upcoming regulatory adjustments concerning benchmarks and offsets could reshape the market. The analysts shared the latest updates on the CCUS pipeline.

EU ETS: Renewables Keep Prices in Check

In the EU ETS, stronger-than-expected renewable energy deployment accelerated emissions reductions in the power sector, preventing a major price surge. While long-term allowance tightening remains a factor, near-term stability persists due to lower industrial activity and rising carbon efficiency. However, higher aviation emissions and ongoing CBAM discussions could drive shifts in free allocations and demand fundamentals in the coming years.

UK ETS: Aviation Growth and Policy Shifts in Focus

The UK ETS is undergoing critical changes, with aviation emissions projected to rise sharply, approaching power sector levels by 2030. Discussions on maritime sector inclusion and CO₂ transport rules could reshape market fundamentals, while the extension of free allowances to 2026 offers temporary relief to industries. As UK-EU linkage negotiations progress, market participants are closely monitoring potential policy shifts that could influence long-term pricing and compliance strategies.

In a nutshell

Details on Supply, Demand and Pricing

The webinar detailed the supply, demand and pricing in the key markets: for 2025 as well as for the long term. To learn more, please reach out to our analysts at InSight@cCarbon.info

Members can access the following resources that provide an update on the models:

Clean Fuels Markets:

1. North American Clean Fuel Standards Interplay and Pricing Outlook 2030
2. North America Renewable Diesel Outlook

Cap and Trade markets

1. Great Expectations: What to Watch in Carbon Markets in 2025 and Q1 WCI/WCA Auction Expectations

Carbon Offsets Markets

1. CCO and WCO Forecast Update
2. Compliance Offset Opportunities Around the World: Reliable Demand
3. North American Forestry Outlook