Emissions Markets
Emissions markets are a cornerstone of climate policy, and have been established by over 20 governments globally. Major emitters in these jurisdictions must purchase emissions permits (aka carbon allowances) for each tonne of CO2e emitted. By design, carbon allowances are finite and declining in supply, resulting in upward price pressure on their clearing price. Through this market-based approach, governments can meet ambitious net zero goals, leveraging the invisible hand of the market to ensure that emissions are reduced at the lowest cost to society.
The currency of
decarbonization
Emissions markets are a cornerstone of the fight against climate change and have have been established by over 20 governments globally. Major emitters in these jurisdictions must purchase emissions permits (aka carbon allowances) for each tonne of CO2e emitted. By design, carbon allowances are finite and declining in supply, resulting in upward price pressure on their clearing price. Through this market-based approach, governments can meet ambitious net zero goals, leveraging the invisible hand of the market to ensure that emissions are reduced at the lowest cost to society.
Carbon allowances are well-positioned to become one of the major commodity markets globally, with an estimated market capitalization of $1 trillion1 by 2030, rivaling that of silver and cryptocurrencies.
1. Unlocking the Potential of Carbon Markets to Achieve Global Net Zero, BCG 2021
Investment Highlights
Downside Protection
Governments actively implement floor prices or volatility management tactics to ensure a steadily rising carbon price to incentivize decarbonization.
Significant Upside
Diversification
Impact
Secure & Transparent
Investment Highlights
Downside Protection
Emissions regulators actively implement floor prices or volatility management tactics to ensure a steadily rising carbon price to incentivize decarbonization.
Significant Upside
Material gap between market price and the social cost of carbon, aggressive supply management by regulators, and presence of near-term catalysts provide strong upward pressure on prices.
Diversification
Carbon allowances are uncorrelated to traditional asset classes such as equity, bonds, and commodities, creating insulation from today’s prevailing macroeconomic headwinds.
Impact
Purchasing allowances withholds supply, increasing the cost of emissions and incentivizing decarbonization. Empirical evidence shows compliance markets have been highly effective at reducing emissions.
Secure & Transparent
Market infrastructure is directly managed by government agencies, with assets held in secure accounts, limiting counterparty risk.
How do emissions markets work ?
Emissions markets put a price on pollution by facilitating market trading of carbon allowances instead of direct taxation (“carbon tax”). Generally, these allowances allow entities covered by the carbon market to emit CO2 (or equivalent) on a 1:1 basis.
How do emissions markets work?
Emissions markets aim to put a price on pollution through facilitating market trading of carbon allowances instead of direct taxation (“carbon tax”). Generally, these allowances allow entities covered by the carbon market to emit CO2 (or equivalent) on a 1:1 basis.
1 carbon allowance = the right to emit 1 ton of CO2e.
The adoption of emissions markets globally is accelerating.
The adoption of emissions markets globally is accelerating.
In 2023, these markets covered ~12Gt CO2e, representing 23% of global greenhouse gas emissions; coverage is accelerating as more countries are developing their emissions programs.
With over $900B in annual traded value in 2023, emissions markets are one of the world’s major commodity classes.
Emissions markets are a centerpiece of the Paris Agreement’s goal of limiting temperature increases to below 1.5 degrees celsius.
Why invest in carbon allowances ?
Real demand
Finite supply
Stable, liquid and transparent markets
Growing political and cultural tailwinds
Why invest in carbon allowances?
Real demand
Given a lack of cheap carbon abatement options, emitters must purchase carbon allowances to continue running their business and avoid steep fines for over-emitting. Carbon allowances are a critical input for industry, much like land and labor.
Finite supply
Governments issue a declining number of carbon allowances each year to achieve the ultimate goal of decarbonization. As emitters run out of cheap carbon abatement options, they are forced to buy carbon allowances, driving up the price.
Stable, liquid and transparent markets
Unlike carbon offsets used in voluntary carbon market where supply is effectively unlimited and demand is fickle, emissions markets have built in stability mechanisms to ensure smooth market functioning, backed by the full power of government regulators.
Growing political and cultural tailwinds
As extreme weather events and assets become ever more uninsurable, public awareness of climate change and calls for action will only grow. Climate awareness is especially strong amongst the younger generation that will increasingly decide and influence policy directions.
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