🏭Economics of carbon market investments

2021 was a defining year for carbon markets

As an asset class, it is making headlines in terms of both performance and climate impact. While the voluntary offset market made huge strides, it was dwarfed by the much larger, more liquid segment of the ecosystem – the compliance market. All major compliance markets—those administered by centralized governing bodies such as the European Commission or the California Air Resource Board—experienced significant gains, with the European Union, the largest submarket, being the strongest.

As efforts to decarbonize the global economy increase, demand for voluntary carbon credits will continue to rise.

2021 carbon market's performance

• The IHS Markit Global Carbon Index returned 108% in 2021, which explains why this market caught investors’ attention.

• European Union carbon allowance (EUA) futures returned 138% over the year, California returned 73%, and the RGGI returned 68%.

• These three main ingredients of the IHS Markit index contributed to the 108% blended return of the benchmark, with the internal price of carbon in the index rising from $24.78 to $51.451.

Factors that will drive the 2022 market performance :

• Launch of UK carbon market: The post-Brexit UK market launched its own futures and got included in the IHS index.

• Regional Greenhouse Gas Initiative (RGGI) hits an all-time high: The first mandatory cap-and-trade program in the US to limit carbon dioxide from the power sector hits an all-time high. The clearing price was $13.00/ton, roughly 40 percent higher than the $9.30/ton price at the last auction in September.

• China’s new ETS market; Korea's opening-up In July of 2021, China officially launched its national carbon emissions trading market, which is positioned to be the world’s largest. China is expected to further expand the program, opening it to financial institutions and emitters in sectors such as non-ferrous metal and building materials.

Depending on different price scenarios and their underlying drivers, the market size in 2030 could be between $5 billion and $30 billion at the low end and more than $50 billion at the high end.