The Golden Opportunity in California Carbon

Tom Roderick

Thomas Roderick

Portfolio Manager

Tom Roderick

Thomas Roderick

Portfolio Manager
Thomas began his career in hedge funds at the start of the global financial crisis, before managing a macro portfolio at Eclectica under Hugh Hendry. Thomas manages a discretionary global macro strategy for Trium. The strategy follows a traditional thematic approach to macro investing, with a focus on identifying and monetising major macroeconomic and geopolitical trends. Tom invests across fixed income, FX, commodities and equities, with a global remit encompassing both developed and liquid emerging markets. Thomas holds an MSci Physics from Imperial College, London.
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California’s carbon market just got political. After President Trump deployed the National Guard to Los Angeles in response to ICE raid protests, tensions with Democratic Governor Gavin Newsom hit a new high. The two have clashed repeatedly, and with Newsom eyeing a 2028 White House bid, the environmental clash is getting dirtier.

The Backdrop

Trump’s latest move: directing the DOJ to try and shut down California’s cap-and-trade program, the emissions trading scheme at the heart of the state’s 2045 plan for carbon neutrality. He’s labelled it a “radical” drag on American energy. Newsom, sensing political upside, jumped to defend it. This isn’t just environmental policy, it’s a fight for narrative control ahead of the next election cycle as well as significant source of tax revenue for California.

Nowhere is the climate fight more vivid than in California. Wildfires continue to devastate parts of the state, with climate change blamed by many (though Trump blames water mismanagement). We’ve written before on how decarbonisation creates tradable distortions, California’s carbon market is a prime example.

Price Dislocation = Opportunity

Prices were already soft on uncertainty around the scheme’s post-2030 future. Trump’s shutdown threat triggered a further sell-off. Now, carbon allowances are on the floor. Quite literally. May’s quarterly auction failed to clear at the price floor meaning that 16% of new issuance was withheld from the market until at least next year. That puts a cap on downside from here.

If Trump’s effort fails, a return to pre-election levels would deliver a 50%+ return. You don’t need options when the asset price itself carries that kind of asymmetry. Even better as you can see in the chart the floor is not flat but is a staircase with a riser of 8% per year (inflation +5%). The system ensures a base of rising prices by design.

California Carbon Offset Futures
Source: Trium Capital and Bloomberg

History Rhymes

We’ve been here before. Trump tried to kill the program during his first term. The courts shut him down. We expect a similar outcome this time and we don’t sense it is a real priority for the administration. There is the possibility that continued legal challenges sour investors towards the market and prices dip temporarily below the floor. That leads to more failed auctions and a lack of supply for emitters who still must meet their obligations. This is what the floor is for, the system is self-correcting. Less credits issued would cause a squeeze and push prices back up.

Yes, carbon markets come with regulatory risk, without regulation the price would be zero. Trump’s executive order should be regarded as little more than posturing. A Trump win here would raise broader rule-of-law questions and likely damage confidence across U.S. markets. There are better hedges for that scenario.

Positioning looks clean after a couple of early attempts by speculators to buy the dip prior to hitting the floor. Speculative positioning as a proportion of open interest is at 4-year lows.

More likely: this episode galvanises support to extend and strengthen the scheme. That means tighter supply, higher prices, and tailwinds for long positions. Next year we may have stopped talking about the floor and started worrying about the ceiling.

The Trade

Long CCAs. Limited downside thanks to the floor. Regulatory overhang already priced in. And a real catalyst path to upside. This is a rare moment where policy risk has created a clean macro trade at distressed valuations with a defined downside.

Spec positioning
Source: Trium Capital, Bloomberg, and ICE

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