WCI bets on EV sales s-curve to stave off potential carbon price of USD 230/t by 2045

Over the past several years, California and Quebec have made increasing efforts to strengthen their respective climate targets. The two jurisdictions have jointly implemented policies to completely phase out the sale of new internal combustion engine (ICE) vehicles by 2035. California is going further by banning the installation of new gas boilers in buildings from 2030.To better align their cap-and-trade programs with their updated climate targets, California and Quebec regulators are currently conducting a reform process aimed at increasing their programs’ stringency.

Most notably, regulators are considering reducing 2026– 2030 supply by either 180 or 265 million allowances in California and an additional 17 million in Quebec. California regulators are also looking to extend their ETS through 2045 to help achieve its net-zero target for that year.When looking at the role supply and policy play in shaping future allowance prices, Veyt analysis revealed that prices depend largely on those jurisdictions’ phaseout of both gas boilers and ICE vehicles. In one scenario where the technology ban in successful, the carbon price will be about USD 40/t in 2030 and just over USD 100/t in 2045. In an instance were upholding these bans in unsuccessful, allowance prices may be substantially higher, reaching levels close to as USD 90/t in 2030 and over USD 230/t in 2045.

ICE and Gas Boiler sales phase-outs could alleviate the pressure on the ETS significantly

“California’s ability to adhere to its ambitious EV target will be the main driver in how prices in the ETS playout. EV adoption rates have been strong – driven by state subsidies and climate conscious consumers with deep pockets. If the ICE and gas boiler bans are not successfully implemented, the long-term demand for allowances will substantially increase to such an extent that allowance prices will hit the triple digits by 2033”, says Luke Sideropoulos, North American carbon analyst.

North America's leading carbon market

Operating under the Western Climate Initiative (WCI), the California-Quebec joint ETS is the most extensive and ambitious cap-and-trade program in North America. Covering the transportation, power, building, and industrial sectors, the joint ETS covers nearly 80% of the jurisdictions’ respective emissions. In order to ensure that the ETS continues to play a key role in their increasingly ambitious decarbonisation targets, California and Quebec regulators have initiated a process aimed at increasing their programs’ stringency. Currently, California regulators are considering several different allowance reduction scenarios that could entail up to 265 million allowances removed from 2021 – 2030 budgets as well as extending the program through 2045. 

Veyt has forecasted four scenarios for potential future developments in the California-Quebec system. The first set of scenarios forecasts prices under two different supply pathways through 2045 – one that incorporates California’s supply scenario Option 1 and a reduction of 17 million allowances from Quebec (labeled Option 1) and another that incorporates the Option 2 supply scenario for California and the same reduction from Quebec (labeled Option 2). In addition to different supply outcomes, we also incorporated scenarios on whether the jurisdictions are able to uphold regulation that phase-out new gas boilers from 2030 and ICE vehicles in 2035.

The two different supply scenarios in our forecast reflect the different cap-tightening measures the California Air Resources Board (CARB) is considering. Supply Option 1 removes 180 million allowances from 2026-2030 followed by a linear reduction through 2045. Option 2 removes 265 million allowances from 2026-2030 budgets, plateaus through 2036, before reducing linearly to 2045. The additional 17 million Quebec allowances removed from supply assume regulators from the province follow through on their proposal to do so in their last joint workshop with California in November. In the modelled supply scenarios, the steepest cuts to supply will take place from 2026 – 2030. The joint cap is projected to drop by 27% by the end of the decade in Option 1 and 39% in Option 2. The more accelerated rate at which the Option 2 supply cap reduces through 2030 pushes prices higher than in Option 1. The more constant rate of decline in Option 1 allows market participants more intertemporal optimisation, resulting in lower prices through 2035 – irrespective of a successful technology ban.