Portfolio Manager
Share on
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.
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.
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.
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.
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.
To access Trium Capital strategies, please select your investor type and territory from the below options:
Please indicate by clicking the box below, that you have read and agree to the following important information:
The content on www.trium-capital.com (the “Site”) is general information which is provided without any warranties of any kind, whether express or implied by any means whatsoever. While we have sought to ensure that the content contained on this Site is timely and accurate, we make no representation, warranty or statement of any kind with respect to the Site and the timeliness, accuracy or correctness of the content provided herein. We may change the content at any time without notice and, to the fullest extent permitted by law, will not be liable for errors or omissions in the content.
Any entry into a contract with any party mentioned on this Site or in respect of any product referred to on this Site shall be subject to the terms of that contract, and the information contained on this Site shall not constitute a representation, warranty or statement in respect of such contract to the fullest extent permitted by law.
By using this Site, you acknowledge that the Site contains copyrighted materials as well as trademarks and service marks that are owned by Trium Capital LLP, or its affiliates (“Trium”) or third parties. Nothing contained in this Site shall be construed as conferring any right to any copyright, trademark or other proprietary interest of Trium or any third party. You agree not to infringe upon any copyright, trademark, service mark or patent right, and to comply with all law and regulation in respect of any permitted use or viewing thereof. You also agree that you will not alter or remove any copyright, trademark or any other notice from any authorised copy of the content on this Site.
Certain links in this Site connect to websites maintained by third parties. We make no representations or warranties as to any content contained in these third party sites and take no responsibility for such sites. Our link to another site is not an endorsement of that site.
We are not responsible for providing you with, on behalf of anyone other than ourselves, information required under Article 13 or 14 of Regulation (EU) 2016/679 of the European Parliament and of the Council of 27 April 2016, on the protection of natural persons with regard to the processing of personal data and on the free movement of such data, and repealing Directive 95/46/EC (General Data Protection Regulation). We may provide you with access to other websites which contain information pursuant to such regulatory obligations on behalf of third parties, but we make no representation, warranty or statement as to the completeness, accuracy or truthfulness of such information.
In no event will Trium be liable for any damages, expenses or losses, including without limitation direct, indirect, consequential, special, incidental or punitive damages resulting from or caused by the use of this Site or the information herein (or any information on a linked website), the inability to use this Site or the information herein, any delay in operation or transmission or any communication line or system failure.
Your access to and use of this Site are subject to the terms and conditions contained herein. By accessing and using this Site, you accept these terms and conditions, without limitation or qualification. These terms and conditions may be supplemented, amended and/or rectified at any time by Trium.
This Site is operated and issued by Trium Capital LLP which is authorised and regulated by the Financial Conduct Authority (Register number 497640). You can gain access to the FCA’s rules and guidance notes from the following link: www.fca.org.uk.
Please visit the main website of Trium Capital LLP, www.trium-capital.com for full regulatory disclosures.
This website is issued by Trium Capital LLP, a limited liability partnership incorporated in England & Wales (Partnership number OC343790) which is authorised and regulated by the UK Financial Conduct Authority (FCA) (497640).
The information presented herein expresses the personal views of authors in the current economic environment and not necessarily those of Trium Capital LLP (“Trium”). This information is intended for informational purposes only and does not qualify as investment advice nor does it constitute an offer to sell or the solicitation of an offer to buy any securities or interest in any fund managed or operated by Trium or its affiliates.
Any articles on this site may contain forward-looking statements relating to the objectives, opportunities, and the future performance of the U.S. market generally. Forward-looking statements may be identified by the use of such words as; “believe,” “expect,” “anticipate,” “should,” “planned,” “estimated,” “potential” and other similar terms. Examples of forward-looking statements include, but are not limited to, estimates with respect to financial condition, results of operations, and success or lack of success of any particular investment strategy. All are subject to various factors, including, but not limited to general and local economic conditions, changing levels of competition within certain industries and markets, changes in interest rates, changes in legislation or regulation, and other economic, competitive, governmental, regulatory and technological factors affecting a portfolio’s operations that could cause actual results to differ materially from projected results. Such statements are forward-looking in nature and involve a number of known and unknown risks, uncertainties and other factors, and accordingly, actual results may differ materially from those reflected or contemplated in such forward-looking statements. The reader is cautioned not to place undue reliance on any forward-looking statements or examples. Neither the author nor Trium or any of its affiliates or principals nor any other individual or entity assumes any obligation to update any forward-looking statements as a result of new information, subsequent events or any other circumstances. All statements made herein are only as of the date that they were made.