Bloomberg New Energy Finance (BNEF)’s latest outlook report has predicted that the global carbon market is set to exceed $800 billion this year, marking a 5% year-over-year growth, even though trade volumes have fallen due to Russia’s war in Ukraine.
The expansion is an outcome of rising allowance prices driven by reforms aimed at boosting the potential of carbon markets. However, these gains have been somewhat diminished by concerns surrounding energy affordability and security.
While trading levels are dampened, BloombergNEF expects compliance carbon markets to remain an important tool for lawmakers this decade. New markets are set to be initiated in Brazil, Mexico and India, and regulators will continue to carry out supply-cutting reforms in existing markets, increasing prices.
Singapore-based carbon exchange Climate Impact X (CIX) launched its global spot trading platform, CIX Exchange, which aims to boost the liquidity of carbon offset. (Photo: Climate Impact X)
BNEF’s outlook for the European Union’s Emissions Trading System estimates (ETS) allowances prices will reach €149 per metric ton ($157/t) this year, up from around €85/t for now. The projection for the California-Quebec market sees prices almost doubling to $63/t by 2030.
Carbon markets can be categorized into two main types: compliance and voluntary. Compliance markets are established in response to mandates from national, regional or international policies. Voluntary one involves the trading of carbon credits on a non-mandatory, voluntary basis.
A form of compliance market is the emissions trading system, which operates on the “cap-and-trade” principle. Under these systems, regulated entities, or in the case of the EU’s ETS, entire countries, are allocated emission, pollution permits or known as allowances, by authorities.
Entities that surpass their allocated emissions limit must buy permits from those who have surplus permits available for sale, facilitating emissions trading. The EU introduced the world’s first international ETS in 2005, and since then, many other national and regional ETS have been established.
China initiated the world’s biggest emissions trading system in terms of emissions being regulated in 2021. The ETS is estimated to encompass about 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 targets, even though it has encountered many challenges.
The EU still holds the title of the world’s largest carbon market in both traded volume and overall value. However, its dominance is diminishing, with the EU accounting for 75% of the global carbon market futures and auctioned volumes, equivalent to about 8 billion allowances presently. This share has declined from nearly 90% in 2017.