Carbon Cap‑and‑Trade: We See a Compelling Opportunity


  • To combat climate change, policymakers are increasingly adopting “cap-and-trade” programs, which typically issue a declining number of greenhouse gas (GHG) emission allowances each year, capping the pollution businesses can emit.
  • Carbon allowance supply will, in our view, shrink faster than covered entities can move to green power technologies, supporting allowance prices.
  • California represents one of the most attractive carbon markets, with mechanisms to prevent emission prices from falling too low or rising too high.
  • We believe that as California Carbon Allowance (CCA) demand eclipses an ebbing supply, more investors will enter the market, boosting CCA demand and price – benefiting those who invested early.

As the international community races to combat climate change, policymakers are increasingly adopting a range of market-based incentives to reduce carbon emissions. Key among these are cap-and-trade programs. Cap-and-trade systems limit the total amount of carbon that can be emitted (cap) and allow the market to determine the price where the demand to emit matches the supply of allowances (trade). In essence, cap-and-trade programs use market forces to put a price on carbon, and this price on carbon creates a cost for companies and incentivizes them to reduce emissions.

How does cap-and-trade work?

A cap-and-trade system typically issues a declining number of emissions allowances each year – capping greenhouse gas (GHG) emissions. Covered entities – primarily companies that generate electricity, supply transportation fuels and natural gas, or operate large industrial facilities – acquire emission allowances. They do this in different ways, but typically it is some combination of receiving allowances directly from the program administrator or buying allowances in an auction, or buying allowances in the secondary or futures market. Covered entities then surrender carbon allowances commensurate with the amount of carbon they emit each year. It is similar to how individuals and companies pay taxes, but instead of declaring income and paying in a given currency, they declare carbon emissions and pay with emission allowances.