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Compliance carbon markets, a bright future ahead

Compliance carbon markets have become an essential tool for lawmakers around the world, and commodity researchers believe that their rise will continue throughout the next decade.

Last year, according to researchers at BloombergNEF, the total value of compliance carbon markets topped $800 billion, a 5% year-on-year growth rate in terms of value despite a fall in volume.

There are several reasons why this growth is set to continue in 2024 and beyond, including the implementation of a new EU border mechanism.

Here are five developments you should be aware of:

New carbon market launches are expanding the market

The EU Emissions Trading scheme (EU ETS) still accounts for the bulk of carbon market futures and auctioned volumes traded, but as new carbon markets are launched in India, Brazil and Mexico, the EU scheme’s share of global ETS’s is falling.

The EU ETS compliance market has already fallen to 75% of the global carbon market futures and auctioned volumes traded, compared to 90% in 2017. 

The carbon ecosystem is becoming increasingly compliance based

At present there are two different types of carbon markets: compliance and voluntary.

Companies can buy credits to offset their carbon emissions on a voluntary basis, but credit purchases on compliance markets are mandatory. In contrast, those companies that emit large amounts and have to adhere to regulatory targets of carbon dioxide emissions must buy credits to meet carbon reduction targets.

Experts believe that the compliance market will begin to dominate. At present, the voluntary market is over twice as big as the compliance market, but this is changing fast.

William Pazos, co-founder of carbon-focused trading exchange ACX, recently told ratings agency S&P that he believes that 90% of the market will become compliance credits, as more and more countries move to this structure to eliminate risk around standards.

CBAM is pushing other countries into pricing carbon emissions

The launch of the EU’s CBAM (Carbon Border Adjustment Mechanism) on October 31, 2023, is likely to speed up the introduction of carbon emission pricing in other nations.

Since that date, countries have had to report on the emissions that are caused by the production and transportation of certain goods – their ‘embedded emissions’. From January 1, 2026, they will have to pay for these emissions.

Initial sectors covered by CBAM are electricity, hydrogen, cement, fertilizers, aluminium, iron, and steel. This is set to be expanded to include aviation, maritime, lime, oil refining, all metals, pulp and paper, glass and ceramics, acids, and organic chemicals by 2030.

S&P calculates that CBAM will raise at least $80 billion each year by 2040, prompting countries to put in carbon pricing systems of their own to ensure that they capture some of this revenue themselves.

The UK has already announced that it will introduce a CBAM scheme of its own from 2027.

The UK Government is consulting on ETS changes

As well as confirming that the UK ETS will run until 2050, the UK Emissions Trading Scheme Authority is seeking views on proposed changes to the scheme regarding a new mechanism for adjusting the supply of carbon allowances in response to demand as well as the continuation of the authority’s powers to intervene if the carbon price rises rapidly.

Interested parties have until March 11, 2024 to reply to the consultation here.

The first statutory review of the UK ETS, published in December, also indicated that the scheme is working well and achieving its purpose. The next review is due before 2028.

Ministers are calling on the EU to rethink maritime ETS

The EU ETS was extended to shipping on January 1, 2024, but ministers from Southern Europe are already calling for the plans to be paused, saying that the extension of the regulatory policy could actually increase emissions.

Ministers from seven EU countries, including Spain, Italy, Greece and Portugal, wrote to the European Commission.

The letter, reported by the Financial Times newspaper, said the scheme could incentivise ships to divert and take longer routes to avoid the tax, increasing emissions. They added that the maritime ETS risked driving business away from European ports.

However, the Commission replied that there were measures in place to avoid this happening, and it was ready to look at adjustments if there was evidence of ‘carbon leakage’, where businesses take steps to move trade to countries with lighter climate control mechanisms, resulting in higher emissions.

The EU ETS shipping tax currently covers COemissions from all large ships of 5 000 gross tonnage and above entering EU ports, regardless of the flag they fly. 

The system covers 50% of emissions from voyages starting or ending outside of the EU and100% of emissions that occur between two EU ports.

There is an initial phase-in period, with shipowners liable for 40% of emissions reported in 2024, rising to 100% by 2027.


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