EMISSIONS TRADING MARKET ANALYSIS

The global Emissions Trading market size was valued at US$ 334.80 billion in 2023 and is expected to reach US$ 1,510 Billion by 2030, grow at a compound annual growth rate (CAGR) of 24% from 2023 to 2030

Emissions trading, also known as cap-and-trade, is a market-based approach to controlling greenhouse gas emissions. It operates under the premise of setting a cap on the total allowable emissions from specific industries or regions. Companies are allocated emission allowances corresponding to their permitted emission levels. If a company emits below its allotted amount, it can sell the surplus allowances to other companies exceeding their emissions limits. This system incentivizes emissions reductions as companies strive to maintain compliance while providing flexibility in achieving emission targets. Emissions trading has gained prominence globally as a crucial tool in addressing climate change, fostering cooperation among industries, and encouraging investment in cleaner technologies.

The emissions trading market has witnessed significant growth in recent years, spurred by mounting environmental concerns and international efforts to combat climate change. Various regions, including the European Union, China, and parts of the United States, have implemented emissions trading systems to regulate greenhouse gas emissions effectively. Additionally, the voluntary carbon market has emerged, enabling businesses and individuals to offset their carbon footprint voluntarily. As more countries and companies commit to reducing their carbon emissions, the emissions trading market is likely to continue expanding, playing a vital role in the global transition towards a more sustainable and climate-conscious future.

The European Union Emissions Trading System (EU ETS) is the largest carbon market in the world, accounting for around 90% of global carbon credit trading volume. The EU ETS is expected to continue to grow in the coming years, as the European Union commits to reducing its greenhouse gas emissions by 55% by 2030.

Other major carbon markets include the California Cap-and-Trade Program, the Regional Greenhouse Gas Initiative (RGGI), and the South Korean Emissions Trading Scheme. These markets are all expected to grow in the coming years, as more countries and businesses adopt carbon pricing policies.

Emissions Trading Market Regional Insights

North America: In North America, emissions trading has been implemented at both the national and regional levels. The United States and Canada have participated in various emissions trading programs, with the most notable being the Regional Greenhouse Gas Initiative (RGGI) in the northeastern states of the U.S. and the California Cap-and-Trade Program. These programs aim to cap greenhouse gas emissions from power plants and industries and allow entities to trade emission allowances. North America has shown a commitment to addressing climate change through market-based approaches like emissions trading.

Europe: Europe is the second-largest market for Emissions Trading, accounting for a share of over 80% in 2022. Europe is a pioneer in emissions trading and has the world's largest and most mature carbon market, known as the European Union Emissions Trading System (EU ETS). The EU ETS covers various sectors, including power generation, manufacturing, and aviation. It has undergone several phases of development, and its mechanisms have influenced emissions trading programs worldwide. The EU ETS has played a significant role in reducing carbon emissions within the European Union and has been a driving force in the transition to cleaner energy sources.

Asia-Pacific: Asia Pacific is the fastest-growing market for Emissions Trading, accounting for a share of over 6% in 2022. In the Asia-Pacific region, emissions trading initiatives have been gaining traction in recent years. Several countries have been exploring or implementing emissions trading schemes as part of their efforts to combat climate change. For example, China launched pilot emissions trading programs in several provinces and cities, with plans to establish a national carbon market. South Korea has also implemented an emissions trading system, while Japan has been considering introducing a national carbon market. The region's growing interest in emissions trading reflects the increasing recognition of the need to address greenhouse gas emissions and promote sustainable development.

 Figure 1. Global Emissions Trading Market Share (%), by Region, 2023

Emissions Trading Market Drivers:

• Environmental Concerns and Climate Change Mitigation: The primary driver behind emissions trading is the global concern about climate change and its adverse impacts. Governments and international bodies recognize the need to reduce greenhouse gas emissions to limit global warming and its consequences. Emissions trading provides a market-based approach to incentivize emission reductions and promote the transition to cleaner and more sustainable practices.
• Regulatory Compliance and International Commitments: Many countries have set emission reduction targets and commitments under international agreements like the Paris Agreement. Emissions trading enables countries and industries to meet their regulatory obligations more cost-effectively by trading emission allowances and credits, providing flexibility in achieving emission reduction goals.
• Economic Efficiency and Cost-Effectiveness: Emissions trading allows companies to find the most cost-effective ways to reduce emissions. It creates a market for emission allowances, where those able to reduce emissions at lower costs can sell their surplus allowances to those facing higher costs, encouraging emission reductions where they are most economically viable.
• Stimulating Clean Technologies and Innovation: Emissions trading incentivizes businesses to invest in cleaner technologies and practices. Companies that reduce emissions below their allocated allowances can sell the excess allowances, creating financial incentives to invest in low-carbon technologies and innovative solutions to decrease emissions.

Emissions Trading Market Opportunities:

• Expansion of Emissions Trading Schemes: As more countries and regions commit to reducing greenhouse gas emissions, there are opportunities to expand existing emissions trading schemes and implement new ones. Governments can explore the potential of emissions trading in different sectors, such as transportation, industry, and agriculture, to achieve broader emission reduction targets.
• Linking Emissions Trading Systems: Linking emissions trading systems between different countries or regions offers opportunities to create a larger and more liquid market for emission allowances and credits. This linkage can enhance cost-effectiveness, encourage international cooperation, and increase the overall impact of emission reduction efforts.
• Inclusion of New Greenhouse Gases: Current emissions trading systems primarily focus on carbon dioxide (CO2) emissions. Opportunities exist to expand these systems to include other greenhouse gases like methane (CH4), nitrous oxide (N2O), and hydrofluorocarbons (HFCs). Integrating a broader range of greenhouse gases into emissions trading can address a more comprehensive set of climate change challenges.
• Market-Based Solutions for Net-Zero Goals: Countries and companies aiming for net-zero emissions have opportunities to use emissions trading as a market-based solution to offset residual emissions. Investing in carbon offset projects and nature-based solutions can help achieve net-zero goals more efficiently.

Emissions Trading Market Trends:

• Expansion of Carbon Pricing Mechanisms: More countries and regions were implementing carbon pricing mechanisms, including emissions trading systems and carbon taxes. The adoption of these mechanisms was gradually increasing as a means to incentivize emission reductions and promote a low-carbon economy.
• Integration of Carbon Markets: Governments and organizations were exploring opportunities to integrate various carbon markets and trading systems. Linking emissions trading schemes between different countries or regions can create a larger and more liquid market, enhancing cost-effectiveness and promoting international cooperation in addressing climate change.
• Net-Zero Targets and Carbon Neutrality: The momentum towards net-zero emissions and carbon neutrality was gaining traction globally. Many countries and companies were setting ambitious targets to achieve net-zero emissions by a specific target year. This trend was driving increased interest in emissions trading and carbon offset projects to compensate for remaining emissions.
• Focus on Nature-Based Solutions: Nature-based solutions, such as afforestation, reforestation, and ecosystem restoration, were gaining attention as means to sequester carbon dioxide from the atmosphere. Emissions trading was increasingly supporting such projects to generate carbon credits and facilitate investment in nature-based climate solutions.

Emissions Trading Market Restraints:

• Political and Policy Uncertainty: Political changes and uncertainties in climate policies at the national and international levels can impact the stability and effectiveness of emissions trading systems. Shifting policy landscapes and government priorities may lead to fluctuations in the demand for emission allowances and credits, affecting market dynamics.
• Insufficient Stringency: In some cases, emissions trading systems may not have stringent enough caps on emissions, resulting in a surplus of allowances and limited incentive for companies to reduce emissions. This can lead to a lack of substantial emission reductions within the market.
• Market Manipulation and Price Volatility: Emissions trading markets are vulnerable to market manipulation, such as hoarding or dumping emission allowances to influence prices. Price volatility can create uncertainty for market participants and undermine the credibility of the system.

Recent Developments

New product launches

• Voluntary Carbon Standard (VCS) launched a new crediting approach for nature-based solutions in 2022. The new approach, called VCS Nature, is designed to help businesses and organizations reduce their emissions by investing in projects that protect and restore forests, wetlands, and other natural ecosystems.
• Climate Action Reserve (CAR) launched a new crediting approach for agricultural carbon offsets in 2022. The new approach, called CAR Ag, is designed to help businesses and organizations reduce their emissions by investing in projects that improve agricultural practices and sequester carbon in soil.
• Gold Standard launched a new crediting approach for renewable energy projects in 2022. The new approach, called Gold Standard Renewables, is designed to help businesses and organizations reduce their emissions by investing in projects that generate renewable energy, such as solar and wind power.

Acquisition and partnerships

• In 2022, Verra, a leading provider of carbon credits, acquired Ecosystem Marketplace, a leading provider of market intelligence and insights for the voluntary carbon market. This acquisition will help Verra to expand its reach and capabilities in the voluntary carbon market.
• In 2022, South Pole, a leading provider of carbon offsetting and climate solutions, acquired Plan Vivo, a leading provider of carbon credits from sustainable agriculture projects. This acquisition will help South Pole to expand its portfolio of carbon credits and to offer a more comprehensive range of climate solutions to its customers.
• In 2022, Climate Action Reserve (CAR), a leading provider of carbon credits from forest projects, partnered with the World Resources Institute (WRI) to launch the CAR-WRI Climate Resilience Standard. This standard is designed to help businesses and organizations reduce their emissions and build climate resilience by investing in projects that protect and restore forests.

Figure 2. Global Emissions Trading Market Share (%), by Type, 2023

Top companies in Emissions Trading Market

1. BP Plc
2. Royal Dutch Shell Plc
3. Total SE
4. Chevron Corporation
5. ExxonMobil Corporation
6. Engie SA
7. RWE AG
8. ON SE
9. Vattenfall AB
10. Gazprom
11. Mitsubishi UFJ Financial Group (MUFG)
12. JPMorgan Chase & Co.
13. Goldman Sachs Group, Inc.
14. Citigroup Inc.
15. Barclays PLC

*Definition: Emissions trading, also known as cap-and-trade, is a market-based approach to control greenhouse gas emissions. Under this system, a cap or limit is set on the total allowable emissions, and emission allowances or permits are allocated to companies or industries. Companies that emit below their allocated limit can sell their surplus allowances to those exceeding their cap. This creates a market for buying and selling emission credits, providing economic incentives for emission reductions where they are most cost-effective.