The CCA Market: An Introduction
The California Carbon Allowance (CCA) Market, established in 2013 as a key component of California’s cap-and-trade program, stands as one of the world’s leading carbon-trading systems. Its main objective is to gradually reduce greenhouse gas (GHG) emissions while offering economic flexibility to businesses involved. The CCA Market combines public policy initiatives with market-driven tools to effectively address climate change.
Understanding the Cap-and-Trade Program: What It Is, When It Started, and Why It Matters
The cap-and-trade program is a market-driven environmental policy instrument aimed at reducing GHG emissions or other pollutants by setting a limit ("cap") on the total amount of emissions that can be emitted by regulated entities (such as companies or sectors) during a defined period. This cap is gradually reduced over time, promoting more sustainable practices and lower emissions.
The modern cap-and-trade concept was first applied in the US Acid Rain Program in the 1990s to reduce sulfur dioxide (SO2) emissions, major contributors for acid rains. In the realm of carbon emissions, cap-and-trade programs started emerging in the 2000s. The European Union Emissions Trading System (EU ETS), launched in 2005, was the first large-scale cap-and-trade system specifically targeting GHG emissions. The California cap-and-trade program, introduced in 2013 as part of the Global Warming Solutions Act of 2006 (Assembly Bill 32), is one of the most prominent examples in the US.
This market-driven approach of a cap-and-trade system incentivizes businesses to adopt cleaner technologies, cut emissions at lower costs, and innovate in emission reduction strategies, all while meeting environmental goals. The system fosters long-term investment in sustainable practices and facilitates the transition to a low-carbon economy.
Historical Success of Cap-and-Trade: The US Acid Rain Program
Before the advent of carbon trading systems, the US implemented a successful cap-and-trade program targeting SO2 emissions known as the Acid Rain Program (ARP). Established under the 1990 Clean Air Act Amendment, the ARP aimed to reduce total annual SO2 emissions by 10 million tons relative to 1980 levels. The program introduced an emissions cap and allowed power plants to trade SO2 allowances, providing flexibility in meeting reduction targets.
The CCA System
The CCA system works by setting a cap on the total CO2 emissions permitted across various sectors (e.g., energy, transportation). To comply with this cap, companies must purchase carbon credits, known as California Carbon Allowances (CCAs), where each allowance represents a specific quantity of CO2 that can be emitted.
How are allowances assigned to each company?
Allowances are distributed through several mechanisms.
- Public Auctions: The California Air Resources Board (CARB) organizes annual auctions where companies can purchase CCAs.
- Free Allocation: To prevent larger companies from dominating allowances and disadvantaging smaller entities, a limited number of allowances are distributed for free, based on specific criteria.
- Secondary Market: Companies can trade allowances among themselves, promoting efficient resource allocation.
The emissions cap is reduced annually, decreasing the supply of allowances. This reduction is designed to increase allowance prices over time, incentivizing companies to invest in sustainable alternatives.
Economic and Environmental Impact
Based on the data from the CARB Greenhouse Gas Emissions Inventory for 2000–2022, California has made significant progress in reducing its GHG emissions. Emissions peaked in 2004 at 486.6 MMT CO2e and were reduced to 371.1 MMT CO2e in 2022, marking a significant ~ 23.7% reduction from the peak, which reflects the success of California's comprehensive climate policies.
This reduction has brought emissions below 1990 levels, aligning with the state's climate goals, as California continues to move forward in its efforts to achieve carbon neutrality by 2045 through further emission reductions and promotion of sustainable practices.
The cap reduction has resulted in a decrease in allowance supply, leading to higher CCA prices. This price escalation encourages companies to invest in low-emission technologies, fostering long-term cost savings.
Moreover, the CCA Market relates to the Quebec Cap-and-Trade System, forming a common market through the Western Climate Initiative. This expansion enhanced market liquidity, providing greater stability and effectiveness (Government du Québec, 2024).
Comparison with Other Carbon Trading Systems
European Union: EU ETS
The EU ETS is the largest carbon market globally, operating on principles similar to the CCA Market. Key differences include:
1. Geographical coverage: The EU ETS includes all the EU countries, while the CCA is limited to California.
2. Regulated sectors: The EU ETS covers intra-EU aviation and, from 2027, will include transport and domestic heating.
3. Carbon price: Historically, the prices of European Union Allowances (EUAs) have tended to be higher than CCAs.
Asia and Africa
Several Asian countries have implemented carbon markets.
- Kazakhstan: The Kazakhstan Emission Trading System (KZ ETS) was the first launched in Asia (2013), however it was suspended in 2022, limiting decarbonization incentives (AIFC, 2025). In 2021 it succeeded in covering 47 % of emissions (ICAP, 2024).
- South Korea: The South Korea Emissions Trading Scheme (KETS) was introduced in 2015 and it is the second largest carbon market in scale, after EU ETS. In 2021, it covered almost 88.5% of GHG emissions (ICAP, 2024).
- China: The Chinese national carbon trading scheme represents the largest market in terms of emissions volume coverage, since China is the largest emitter of GHGs.
- Japan: In February 2023, Japan's government announced the GX ETS. The first pilot-scale phase started in October 2023, covering the period 2023–2026. It will be followed by the full-scale phase starting in 2026 (JPX, 2024).
In Africa, there are no active carbon markets, neither active or in the pilot stage. Emission limitations have been introduced only by South Africa through a carbon tax (SARS, 2024). The expansion of these programs has been limited by lack of regulation and by the fact that developing countries need to advance efforts to significantly grow with low-carbon technologies.
Challenges and Future Prospects
Even though the CCA Market serves as an example of how mitigating CO2 emissions exploits the same tools of common trade markets, it has to face different challenges.
1. Risk of relocation: Companies could relocate to other countries with fewer or no emissions regulations.
2. Price volatility: The demand for credits could fluctuate based on economic and political conditions. Major events, such as exceptional natural phenomena, could cause an increment of market volatility.
3. Equity and social impacts: Disadvantaged communities experience disproportionate exposure to pollution, raising issues of environmental justice. Additionally, companies may overbuy allowances and sell them at higher prices, increasing their profits (Heesu, 2024).
On the other hand, there not only challenges, but also opportunities of evolution.
1. Expansion to other sectors: The inclusion of sectors such as construction and private transport can represent an important improvement for this kind of market.
2. International collaborations: The CCA Market can be exported to other countries, creating a unique market on a larger scale. Joining countries with lack of emission regulation would face the challenge of companies’ relocations.
3. New technologies: To reduce companies’ reliance on carbon credits, they are investing in carbon capture, utilization, and storage and renewable-fueled technologies.
Conclusion
The CCA Market is a winning example of using market policies to reduce industrial environmental impact. Its continuous evolution and the increasing interests of global stakeholders would help it to face challenges, allowing it to become a benchmark for other countries. With the appropriate international cooperation, the CCA Market could become a key pillar of the global transition to a low-carbon economy.
For Further Reading
Cap-and-Trade Program Quick Facts, CARB.
Auction information, CARB.
2023 GHG Facility and Entity Emissions, CARB.
Washington’s Cap-and-Invest Program, Department of Ecology, State of Washington.
The Carbon Market, a Green Economy Growth Tool!, Gouvernement du Québec.
How Can Kazakhstan Improve Its Carbon Regulation System? AIFC report, Astana International Financial Center.
Size & Phases KZ ETS, International Carbon Action Partnership (ICAP)
Size & Phases KETS, International Carbon Action Partnership (ICAP)
China’s National Emissions Trading System, by J. Swartz, International Emissions Trading Association
Carbon Credit Market, Japan Exchange Group (JPX)
Carbon Tax, South African Revenue Service (SARS)
Carbon Trading Is Meant to Make Polluters Pay. In South Korea, It’s Had the Opposite Effect, Climate Advocacy Group Says, by L. Heesu, Bloomberg.
Piergiuseppe Fiore is a petroleum engineer at Eni. He is part of the reservoir management and production data analysis unit, working on injectivity issues, improved oil recovery, and carbon capture and storage. He has also specialized in CFD simulations, publishing several articles. Fiore is an active member of SPE and is part of the YP Board of the SPE Italian Section. He holds an MSc degree in chemical engineering from the University of Calabria and a second-level master’s in petroleum engineering at Polytechnic of Turin.
Bhartendu Bhardwaj is a reservoir engineer at Bassein & Satellite Asset at Oil and Natural Gas Corp. based at Mumbai, India. He has more than 10 years’ experience in onshore and offshore field development from conceptualization to implementation of new exploration licensing policy as well as nomination regime. He currently serves as a section officer of the SPE Mumbai Section and is actively associated with section activities and functioning. He is also part of Indian Hydrocarbon Appraisal Program, an initiative by Ministry of Petroleum and Natural Gas, India. Bhardwaj holds a petroleum engineering degree from Indian Institute of Technology (Indian School of Mines) and a post graduate diploma in business analytics with specialization in finance from Symbiosis International University.
Khawaja Hasnain Iltaf is enrolled in a PhD program in earth and environmental sciences, with a focus on geochemistry and petrophysics, at The University of Texas at Arlington. His research is primarily focused on the investigation of rock properties, fluid-rock interactions, and geochemical analysis leveraging core data. During his master's program, he has conducted comprehensive facies and petrophysical characterizations of tight sandstone reservoirs employing a blend of stochastic and deterministic methods. He has also held roles as an intern and research assistant across various exploration and production companies and academic institutions. He has authored or coauthored 13 research papers published in international journals, alongside 15 poster presentations and published abstracts at international conferences and workshops. He also serves as reviewer for three peer-reviewed journals and served as technical program reviewer for five international conferences. He served as a PetroBowl Volunteer in 2017 and as a Student Chapter Award Judge in 2018.
