Carbon could attract inflation-averse investors

California’s carbon price and inflation

California’s carbon price floor

• Carbon could be the answer for investors looking for a way to shield their returns from rising interest rates and soaring inflation.
• Compliance carbon markets, like the Cap-and-Trade Program in California, offer protection in three ways: by tracking emission-abatement technologies typically driven by commodities (which rise with inflation), by including tighter supply and thus a source of upward price pressure in their design, and by often incorporating a price floor pegged to inflation rates.
• Alongside being a tool for hedging, the carbon price floor can also act as protection for drastic price dips in the California carbon market, such as during a recession.
• The price floor is the minimum price for carbon regardless of the state of economy. The embedded hedge is provided for free for investors in the California carbon market.
• However, there are limitations to the hedging tool. California legislates a holding limit for all entities in the carbon market, which restricts the number of allowances they can keep for future use.