Bloomberg New Energy Finance (BNEF) has reported that the global carbon market is set to surpass $800 billion this year, marking a 5% year-over-year growth, even as trade volumes have dipped due to Russia’s war in Ukraine.
This expansion is a result of rising allowance prices driven by reforms aimed at maximizing the potential of carbon markets. However, these gains have been somewhat mitigated by concerns surrounding energy affordability and security.
Carbon markets can be categorized into two main types: compliance and voluntary. Compliance markets are established in response to mandates from national, regional, and/or international policies or regulations. Voluntary carbon markets involve the trading of carbon credits on a non-mandatory, voluntary basis.
A specific form of compliance market is the emissions trading system (ETS), which operates on the “cap-and-trade” principle. In these systems, regulated entities, or in the case of the EU’s ETS, entire countries, are allocated emission or pollution permits, also known as allowances, by government authorities.
Entities that surpass their allocated emissions limit must purchase permits from those who have surplus permits available for sale, facilitating emissions trading. The European Union introduced the world’s first international ETS in 2005, and since then, many other national and regional ETS have been established, with some already in operation and others under development.
In 2021, China initiated the world’s largest Emissions Trading System in terms of emissions being regulated. This ETS is estimated to encompass roughly one-seventh of global carbon emissions resulting from the combustion of fossil fuels. According to a recent report, China’s ETS has generally been successful in achieving its objectives, even though it has encountered many challenges as a new market.
The European Union (EU) still holds the title of the world’s largest carbon market in both traded volume and overall value. Nonetheless, its dominance is diminishing, with the EU accounting for 75% of the global carbon market futures and auctioned volumes, equivalent to approximately 8 billion allowances presently. This share has decreased from nearly 90% in 2017.