Since 2018, global carbon markets have expanded at an exponential rate. New markets have sprung up as a slew of nations announced net-zero objectives, while existing markets have upped their pricing to seek greater emission reductions. Despite the fact that carbon markets are becoming more widespread, their aims differ widely. The balance of this year and the next will be decisive as countries overhaul their carbon market strategies against rising energy costs and galloping inflation.
Carbon prices are providing an impetus for economic transformation while facilitating sustainable development. To keep the mission to contain the annual temperature rise to 1.5° C alive, carbon pricing has opened the most ambitious route to plug the gap between government policies and commitments. In addition to reducing emissions, carbon pricing may boost industrial and energy efficiencies, reduce dependence on foreign fuels, better air quality, protect and regenerate landscapes and offer a key source of government revenue.
68 carbon pricing instruments (CPIs) are in use worldwide, including taxes and emission trading schemes (ETSs). CPIs in use account for around 23% of total world greenhouse gas emissions pricing and trading. In many geographies, carbon prices have reached record highs. ETS prices reached new highs in the European Union (EU), California, New Zealand and the Republic of Korea, among other markets, while prices for numerous carbon levies also reached lifetime highs. These ETS price surges are driven by policy revisions, speculative investor interest and larger economic developments, particularly in global energy commodity markets. Nonetheless, prices must climb steeply to fulfil the Paris Agreement’s temperature objectives, as a direct carbon price at the level required by 2030 covers less than 4% of global emissions.
Cross-border methods of carbon pricing are becoming increasingly common. The EU is nearing the completion of its carbon border adjustment scheme, while Canada and the United Kingdom are investigating equivalent options. The International Monetary Fund and The World Trade Organization have both advocated for a worldwide carbon pricing floor. The United States of America and the European Union (US-EU) have moved closer to forming the International Climate Club for trade on carbon-based sectoral agreements on steel and aluminium. These methods may help boost domestic support, limit carbon leakage and encourage carbon reductions outside national borders. Other nations are also aggressively coming forward with policy reforms to tighten the global market. Figure 1 presents select nations’ upcoming policy reforms on the carbon market.
Carbon prices are showing a positive cascading effect in industries. Over the past year, global carbon price revenue surged about 60% to roughly US$84 billion. Carbon pricing has been the highest in the EU over the previous three years, while the Regional Greenhouse Gas Initiative price has produced the highest returns in the past year, as the demand for these markets has increased. In the European market, green hydrogen has achieved a break-even, unlike fossil fuel for hydrogen applications in steel production. Green hydrogen production will meet the target of US$2/kg by 2030.
While blockchain has enabled a new wave of decentralised financial innovations that demonstrate the technology’s promise, it has revived some long-standing worries in the carbon market regarding transparency and quality. Gunung Capital, an asset management firm, is experienced in managing investments in carbon-heavy businesses and successful transformations towards low-carbon emissions and clean energy business models. Through value-driven collaborations, Gunung Capital may assist individuals and organisations by building a range of governance frameworks to address issues on the integrity of carbon credits and how firms use them.