international landscape of carbon trading markets

I. Overview of Major Carbon Trading Markets

1. European Union Emissions Trading System (EU ETS)

• Launch: 2005, the world’s first and most mature carbon market.

• Coverage: Power generation, manufacturing, aviation, and more.

• Features: Cap-and-trade system with annually declining allowances; acts as a global price benchmark.

• Development: Now in Phase IV (2021–2030), with tighter emission caps and expanded scope.

2. China National Carbon Market

• Launch: Officially launched in 2021, initially covering the power sector.

• Scope: The largest carbon market by volume of CO₂ emissions covered.

• Mechanism: Based on allowances; draws experience from regional pilots (e.g., Beijing, Shanghai, Guangdong).

• Future: Plans to expand to other high-emission industries such as steel and cement.

3. U.S. Regional Carbon Markets

• No federal market, but two key regional systems exist:

  • California Cap-and-Trade Program: Linked with Quebec; highly active and comprehensive.

  • Regional Greenhouse Gas Initiative (RGGI): Covers electricity generation in northeastern U.S. states.

• Features: Market-based, voluntary participation, robust design.

4. Other Countries and Regions

• South Korea: Korea ETS (K-ETS) launched in 2015, steadily developing.

• New Zealand: Operates a flexible ETS allowing international carbon credits.

• Canada: Provinces like Quebec and Ontario run their own markets; Quebec is linked with California.

II. Types of Carbon Market Mechanisms

1. Compliance Markets

• Government-mandated systems requiring companies to stay within emission caps or face penalties.

• Examples: EU ETS, China’s national market, California’s system.

2. Voluntary Carbon Markets (VCM)

• Non-mandatory participation; organizations or individuals purchase carbon credits to offset emissions.

• Common project types: Forestry (carbon sinks), renewable energy, energy efficiency.

• Certification bodies: Verra (VCS), Gold Standard, etc.

III. Global Trends and Integration

1. Growing Interconnectivity Between Markets

   • Example: California and Quebec have linked carbon markets.

   • Under discussion: EU exploring potential linkage with Switzerland and others.

2. Carbon Border Adjustment Mechanism (CBAM)

   • The EU’s proposed CBAM will tax high-carbon imports, pressuring other nations to adopt carbon pricing systems.

3. Cross-Border Carbon Credit Flow

   • Under the Paris Agreement Article 6, a framework for international carbon credit exchange is forming, aiming to standardize and scale up global carbon trading.

4. Integration with Nationally Determined Contributions (NDCs)

   • More countries are embedding carbon markets into their national climate strategies to meet NDC targets.

IV. Challenges and Opportunities

Challenges:

• Diverse rules and standards hinder market linkage.

• Voluntary markets vary in quality, and oversight is inconsistent.

• Carbon price volatility can affect corporate planning.

Opportunities:

• Net-zero goals drive rapid carbon market development.

• Technological advancements (e.g., MRV systems, blockchain) enhance transparency.

• Growing financial sector involvement; trend toward carbon market financialization.