Carbon market volatility surges as AI, policy shifts reshape US, Canada pricing

Compliance carbon markets across the US and Canada are facing a wave of volatility and structural change, as panelists at the International Emissions Trading Association's North America Climate Summit pointed to the disruptive impacts of AI-driven electricity demand, regulatory reforms, and the uncertain pace of industrial decarbonization.

The Regional Greenhouse Gas Initiative, the oldest multi-state US carbon market, is seeing unprecedented price action.

"RGGI prices are now higher than ever, with the most recent auction clearing at $38 per short ton, four times the price five years ago," Bo Qin, head of environmental markets at BloombergNEF said during the Sept. 22 panel discussion. Qin attributed much of the recent volatility to a surge in electricity demand driven by AI and data centers, as well as broader electrification trends. BloombergNEF revised its demand outlook upward, and is now projecting a 12% increase in demand by 2035, compared to prior expectations of a 40% decline.

"This is a big adjustment, hugely contributed to revised demand forecasts for AI and data centers," Qin said. Price forecasts now point to an average of $39/st this year, rising to $121/st by 2035 if current trends persist.

Platts assessed the RGGI current-month strip at $38.31/allowance on Sept. 24, the next-month strip at $38.45/alw, and the next-December strip at $38.73/alw, climbing $1.05/alw over the day. Platts is part of S&P Global Energy.

Washington's eyes convergence with California

The Washington state carbon market, modeled closely on California's cap-and-trade system, has experienced price swings since its launch, with allowances trading at the highest levels globally through 2025.

"Linkage with California is now the main dynamic," Alex Rau of Environmental Commodity Partners said. "If linkage happens, Washington prices should converge to California's, given the larger surplus and longer history in the latter market. If not, we're headed back to ceiling levels."

The market remains illiquid due to persistent binary risk, uncertainty over linkage timing and potential program repeal. "You don't see a lot of trading in Washington. It's a struggle because liquidity is just not there, and options don't trade with any material size," Rau said.

California-Quebec system remains 'gold standard'

California and Quebec's linked market, often cited as the "gold standard" for subnational carbon trading, is at a turning point. "California has achieved the rare feat of delinking emissions from GDP growth," Mitul Kaushal, engagement manager at cCarbon, said. However, panelists noted that current allowance prices remain subdued, with emissions persistently below the cap due to a combination of weather-driven abatement, refinery shutdowns and natural gas sector reductions.

"We are at the cusp of a significant uptick in prices," Kaushal said, pointing to expectations of a major drawdown in the compliance bank by 2027 as easy abatement options are exhausted. "Long-term signals remain bullish, with our models showing potential for prices to reach $120/ton by 2030."

Platts assessed the CCA current-month strip at $31.38/alw on Sept. 24, the next-month strip at $31.53/alw, and the next-December strip at $31.83/alw, rising 42 cents/alw on the day.

Alberta TIER faces oversupply, regulatory uncertainty

Unlike its US counterparts, Alberta's carbon market operates on an intensity-based benchmark rather than a cap-and-trade framework. Despite a nominal compliance price of $C95/ton, credits in the over-the-counter market trade much lower due to surplus supply and regulatory ambiguity.

"Alberta is oversupplied, and there's still a lot of uncertainty about how the new price floor and harmonization with federal standards will play out," Jennifer McIsaac, chief market intelligence officer at ClearBlue Markets, said. The market's trajectory will depend heavily on the fate of major CCS projects and the enforcement of new credit price floors under an evolving Canada-Alberta memorandum of understanding.

Platts assessed EPCs and AEOs at C$27/metric ton of CO2 equivalent on Sept. 24, holding firm over the day.

Panelists discussed the impact of new mechanisms like California's Manufacturing Decarbonization Initiative, and Alberta's direct investment pathways, which allow compliance entities to fund in-house emissions reductions as an alternative to market purchases. While some expressed concern that such measures could undermine cap integrity by introducing new free allocation pots, others argued that uptake will be gradual and back-loaded, limiting immediate market impacts.

"There's a long way to go before a lot of allowances come into the market," Kaushal said, citing polling data that suggests most entities will wait for regulatory clarity before participating.

Implementation details and transparency requirements remain unresolved, with legislative proposals to pause or amend the MDI still under discussion, McIsaac added.