Policy shifts and political upheaval created a challenging environment for compliance carbon markets in 2024, but winners of this year's Environmental Market Rankings remain upbeat. Rob Langston reports

Despite hopes of a strong year for compliance carbon markets, there were several policy and political obstacles for compliance carbon market participants to navigate in 2024.

Winners of the year's Environmental Market Rankings said the politicisation of ESG and the deprioritisation of net-zero targets in favour of economic growth in some countries continued to be felt in compliance carbon markets, particularly in the US.

Nevertheless, many other countries ploughed ahead with their plans to extend or create compliance markets, and there was movement towards greater cooperation among existing emission trading systems (ETS).

There were further signs of convergence between the compliance and voluntary carbon markets in 2024. For example, progress on Article 6 of the Paris Agreement at COP29 in Baku paved the way for operationalisation of a UN-overseen, intergovernmental carbon market with participation by the voluntary carbon market.

Europe and UK: Speculators, volatility and linking

There were several changes in the EU ETS, with the cap on emissions reducing by 90 million allowances – including a cut for the aviation sector – and the ETS being extended to cover maritime transport. Furthermore, new monitoring and reporting rules were established for ETS2, the planned cap-and-trade ETS covering upstream emissions from buildings, road transport and additional sectors.

In terms of pricing, EU allowances (EUAs) began 2024 trading above €70 ($73.48) per tonne of carbon dioxide equivalent. However, they fell as low as €51.73 in February, before prices recovered to end the year where they started, at €73.

"EU carbon prices dropped to [recent] lows in February last year, and those bearish fundamentals kept EUA prices fairly subdued for much of the year," he says.

"However, we have seen a strong rally over the Christmas period and into January 2025, which appears to have been driven by speculators reassessing their positions and thinking again about the future outlook."

He adds: "This is highlighted by the fact that ICE Commitment of Traders reports show traders' net positions went from [an] over 20 million net short position in October 2024 to [an] over 60 million net long by the end of January 2025."

"If you see the price dynamic and the positioning of hedge funds on a net basis, you cannot help but see a sort of correlation," says Stefan Feuchtinger, head of market research and analysis at Vertis Environmental Finance, named best broker in the OTC/spot for the UK and EU ETSs. "Hedge funds were basically net short for most of last year, but at the beginning of this year they turned to a very large positive holding. So, the question is 'what are hedge funds seeing that maybe not everybody in the market is seeing?'"

Changes to free allocation (FA) over the next couple of years could also have an impact on participants in the EU ETS, says Feuchtinger, and could decline by around 15% between 2026 and 2027.

"The behaviour of different market participants will be key to pricing, and it is always affected by different things, like long-term strategy, liquidity positions, interest rates, etc," he explains. "If there was a 15% reduction in [the] free allocation, for example, how will industry react? Will they start anticipating [hedging] or not?"

CFP Energy's Atkinson says: "Certainly, from our perspective and the clients we work with – compliance buyers in the industrial, shipping and aviation sectors – they are having to get a bit smarter about how they access the market, and we encourage them to think further ahead about their longer-term compliance strategy.

"If technology or budget limitations mean installations can't reduce direct emissions, then companies need to think seriously about putting in place forward allowance hedges to protect their business against rising compliance costs" – Tim Atkinson, director of sales & trading at CFP Energy

"Most operators are going to need to buy more allowances in the future as their free allocation reduces from 2026, at a time where carbon prices are forecast to go up. If technology or budget limitations mean installations can't reduce direct emissions, then companies need to think seriously about putting in place forward allowance hedges to protect their business against rising compliance costs."

In the UK, benchmark UK allowances (UKAs) averaged around £39 ($49.32) per tonne for the UK ETS over the year, and dipped to near £31 before rebounding later in the year, says CFP Energy's Atkinson.

"A lack of ambitious policy reform and clarity in the UK exaggerated the fall for UKAs," he says. "The EU ETS scheme is on a more ambitious and tougher trajectory at the moment and has more clarity around targets and [the] longer term.

Speculation around the linking of the EU and UK ETS has been a significant driver of pricing more recently, as UK Prime Minister Keir Starmer has vowed to 'reset' the UK-EU relationship following Brexit and find new ways to cooperate. The two schemes were separated after the UK left the trading bloc and reports have suggested that linking could be on the agenda for a UK-EU summit later in the year.

Linking could help reduce the cost of cutting emissions, help to increase market liquidity and make prices more stable, with some forecasting a rise in UK prices.

EU legislation already allows for the possibility to link with other compatible ETSs at a global, national or regional level – subject to certain conditions. The EU ETS is already linked with the Swiss ETS.

However, there may be some logistical and political challenges to overcome before linking the EU and UK schemes, such as the carbon border adjustment mechanism (CBAM) – designed to support decarbonising of EU industry by taxing carbon-intensive goods from third countries like steel and cement. The UK has announced plans to introduce its own CBAM in 2027, while the EU's is due in 2026.

"Linking could, of course, be back on the agenda but, if you look at any analysis, there are some real regulatory and practical hurdles to get over, which would likely mean any link is several years away," says CFP Energy's Atkinson. "Not least, the two schemes are now quite different in terms of sector coverage.

"There is a big question mark over the legal basis for any linking regulation: would it take into account European courts for ultimate arbitration?"

He adds: "If linking does come in, then the price of UKAs should trend much higher and ultimately fall in-line with EU prices for full linking. But the practicalities of it actually happening are likely going to take years to sort out."

North America: Kicking the can down the road

In California, questions remain over how the California Air Resources Board (CARB) will implement more ambitious emission reduction targets – of a 48% reduction in 1990 emission levels by 2030 – to meet its statutory net-zero goal following several delayed reviews.

Talks about linking the California-Quebec Western Climate Initiative with the Washington ETS are expected to continue this year after attempts to repeal the state's cap-and-trade system in November.

Political uncertainty over membership of some states in the Regional Greenhouse Gas Initiative (RGGI) has led to some price volatility, amid ongoing legal action over the potential reinstatement of Virginia to the multi-state programme and pressure on other states, such as Pennsylvania, to withdraw. State exits can reduce the allowance budgets, impacting prices and liquidity.

"For markets at large, it has really been a time where the rule-makers are struggling to keep up with industry and the pace at which things are moving, [either] too fast or too slow," says Jonathan Burnston, managing partner at Karbone, named best broker in several categories for North American markets (California and RGGI).

"Overall, there has been a consistent kicking of the can and delays in California and, by extension, other linked markets, like in Quebec. This has led to downward price movement."

"For markets at large, it has really been a time where the rule-makers are struggling to keep up with industry and the pace at which things are moving, [either] too fast or too slow" – Jonathan Burnston, managing partner at Karbone

The return of Donald Trump to the White House following November's presidential elections added to the general level of uncertainty in compliance markets. Hours after his inauguration in January, Trump signed an executive order pulling the US out of the Paris Agreement for the second time. While the move was expected, the pace of change since taking power caught some by surprise.

"There have been green shoots [in the carbon markets]. It has been in recovery since 2023 and we are enthusiastic moving into 2025," says Josh Strauss, President for environmental products at Anew Climate Finance, named best project developer for North America markets (California). "Obviously, there are question marks around what the Trump administration is doing, but we try not to get over our skis in having any concrete expectations until it comes out and makes those decisions.

"We are not betting on a federal cap-and-trade programme in the US anytime soon," he adds. "If there is one thing that we have seen already is that things are going to be a little bit unpredictable.

"We keep a very close eye on the voluntary carbon market because, in the absence of federal legislation and legislation in a number of different national jurisdictions, the voluntary market still has to persist and carry the torch."

"Looking ahead, we expect to see continued growth across the North American compliance carbon markets. This projection is based on a steady number of increased inquiries from consumers, as well as a high level of repeat business from our clients," adds Tom Delaney, president of First Environment, this year's best verification company in North American markets.

In Canada, Michael Berends, CEO of ClearBlue Markets, named best Advisory/consultancy for Europe and North American markets, says there may be a shift in policy as it prepares for elections and life after Justin Trudeau, who is stepping down as leader of the governing Liberal party and has been prime minister for 10 years.

"Canada’s climate policy is set for change in 2025 as the country approaches a federal election," he says. "Liberal leadership frontrunners Mark Carney and Chrystia Freeland have signalled plans to scrap the consumer-facing carbon tax – an idea initially championed by the Conservatives. However, industrial carbon pricing is long-established, with programs in Alberta, British Columbia, and Quebec predating the national carbon price and expected to withstand shifting political winds. The Clean Fuel Regulation is under review, and federal carbon pricing could shift with a new government.

"Affordability concerns are shaping policy debates in both Canada and the US, delaying New York’s Cap-and-Invest and slowing reviews of WCI and RGGI. As Canada navigates these uncertainties, maintaining stability in industrial carbon pricing remains essential for investment, long-term planning, and innovation."

Asia-Pacific: Expanding ahead of CBAM

There was a lot of activity in Asia-Pacific, as the region's disparate compliance markets reacted to supply and demand drivers among domestic buyers, and developments elsewhere.

For example, activity was spurred by the EU's CBAM, which could have a significant impact on the region's exporters. The EU's CBAM aims to ensure that a price has been paid for embedded carbon emissions in the production of goods imported into Europe. However, the EU has committed to helping countries interested in introducing or enhancing their own carbon pricing systems, leading to the establishment of new ETSs.

"It's really the national programmes in Asia where emissions growth is the most predominant, that is attracting a lot of our attention," Dirk Forrister, CEO of carbon market trade organisation IETA, told Environmental Finance earlier this year. "Singapore continued to build alliances, as did Japan and South Korea, and we see the emergence of international demand appearing in Asia. And then, undoubtedly related to Europe's proposed CBAM, [we are seeing] new markets established for Indonesia [in 2023], India [a voluntary market in 2025, followed by a proposed compliance market in 2026], Vietnam [a pilot scheduled for 2025] and Thailand [under consideration].

"Interest is also brewing in a few other jurisdictions like Malaysia and Laos. The whole ASEAN group is looking at [establishing] new markets [and] we are poised to see a rise of activity in Asia."

Elsewhere, China expanded its ETS in 2024 to include more sectors and may also look to further reform the system and include foreign financial institutions for the first time as part of efforts to generate more liquidity, said IETA's Forrister. This could have a significant impact, given the size of the market. Forrister said linkage with other systems – particularly along its Belt and Road Initiative – may also be explored by Chinese authorities.

"There is interest in the internationalisation of the China ETS for China to buy [from other systems] and [whether] would that be a tie with their trading partners in the Belt and Road Initiative," he said. "There are some big, powerful things that China could do, and may consider doing, that increase liquidity and price discovery in some of those other sectors that are not covered."

In New Zealand, another of the region's well-established markets, the ETS announced it would reduce allowances in 2025, which CORE Markets, winner of this year's best broker for the region, noted could "signal the prospect of a supply/demand shift that could lead to tighter market dynamics in the year ahead" and the government is reportedly reviewing allowances for heavy polluters.

“2024 was a milestone year for the Australian Carbon Credit Unit (ACCU) market," says Chris Halliwell, CEO and co-founder of CORE Markets. "It experienced unprecedented growth in traded volumes alongside improved liquidity. This was driven by several factors, including greater participation from liable parties.

“We see more advanced upstream procurement strategies and origination of supply solutions by liable parties. To facilitate this, we expect to see aggressive land acquisition and inception of innovative funding vehicles to ease current capital constraints, especially for capex intensive Environmental Plantings projects.”

He adds: “We expect compliance volumes to step-up further around the FY27-28 period, requiring issuances from new Hproject methodologies to meet this increasing demand. In addition, we will need a new suite of business models and an agribusiness multi revenue stream asset management approach to carbon development. This is expected to become the new norm.”