Compliance carbon markets have expanded globally since the mid-2000s. The European Union ETS, the largest scheme, has progressively tightened emission caps and increased the scope of regulated sectors. It will soon be accompanied by a Carbon Border Adjustment Mechanism (CBAM), which to prevent carbon leakage by taxing imports from regions with less stringent emissions regulations.
As a result, carbon pricing initiatives are becoming significant drivers of environmental and economic change. Carbon markets are likely to play a major role in promoting sustainability and innovation, offering new opportunities for investors and policymakers alike.
Key takeaways:
- Ongoing developments in Europe, coupled with the expansion of carbon pricing initiatives worldwide, suggest that carbon could become a major commodity market.
- The low correlation of carbon prices in the EU ETS with all major asset classes highlights the potential benefits of adding carbon to an investment portfolio. Seen over a 5-year horizon, returns have outperformed major asset classes.
- There are fundamental reasons to expect EU ETS prices to rise over the longer-term, but a range of challenges still have to be addressed with global coordination also important.
