Carbon & Environment

Carbon is a commodity created by regulation. There is no mine or well — supply is a policy cap, and the amount of CO₂ that can be emitted is a political decision. That makes the direction of climate policy the dominant price driver and the dominant risk. Compliance markets like the EU ETS are the deepest and most liquid; renewable energy certificates and voluntary offsets sit alongside them but are thinner and more fragmented, with real differences in quality and verification. Managing risk here is less about physical fundamentals and more about scenario-testing the rules themselves.

How the market works

Most carbon value trades in compliance markets built on a cap-and-trade design. The flagship is the EU Emissions Trading System (EU ETS): a cap is set on total emissions from covered installations, expressed as allowances (EUAs), where one allowance permits one tonne of CO₂-equivalent. Companies must surrender enough allowances each year to cover their emissions; allowances are auctioned and then freely traded, so the price is set by the market against a shrinking cap (the EU cap falls ~4.3% a year, targeting −62% by 2030 versus 2005). Alongside these sit voluntary carbon markets, where firms buy credits from third-party-verified emission-reduction or removal projects to meet self-set net-zero goals — a market defined by project quality and integrity rather than a regulated cap.

Major trade flows

Carbon is fundamentally a policy-created commodity, so “flows” follow regulation: the EU ETS is the largest and most liquid compliance market, with other systems in the UK, California, China and elsewhere. The World Bank reports that direct carbon pricing now covers close to a third of global emissions and raised over US$100bn in government revenue in 2025. Because value depends on regulatory ambition, policy risk — cap tightening, scope expansion (e.g. the new EU ETS2 for buildings and road transport), and border measures like CBAM — is the dominant driver of price.