Cities including Amsterdam, Paris, Singapore and New York are among others competing for status in the carbon-pricing space.

Conclusion of TheCityUK and ICE report published below:

Financial markets support the efficient allocation of capital.

When it comes to the environment, it is now widely accepted that the market mechanism can catalyse the scaling of sustainable finance, with the ultimate benefit of creating the appropriate incentives to meet net-zero targets. The political impetus around addressing climate change has encouraged financial markets to adapt by providing a way to value externalities, like those associated with pollution, carbon sequestration and renewable electricity.

The quantitative analysis in this research was constrained by the information and data publicly available, which is still
relatively limited. The size of this market segment is notoriously difficult to measure as it relates to the extent to which
emissions are treated as liabilities. Indeed, one of the main challenges for the further development of carbon markets
is the accurate and comprehensive monitoring of these markets through official entities which can provide transparent
information about their performance.

Nevertheless, it is clear that carbon markets have grown at record pace in recent years, despite the economic shocks
experienced around the world. The estimated value of the global compliance market was US$850bn in 2021; using
a wider definition (including allowances), the estimate would be considerably higher. Meanwhile, the value of the
global voluntary market reached almost US$2bn.

There is currently a growing demand for credits issued within the voluntary market that could also be used within the mandatory one, as well as an increasing private interest in investing in environmental projects that allow the avoidance, reduction or removal of carbon emissions.

With an increasing number of corporates making net-zero commitments, carbon credits are critical to those firms being able to meet their commitments.

The UK has the potential to be a leader in carbon markets, combining purpose and potential to build the markets of the future.”

‘…Environmental markets are therefore the bridge between science and economics. They help solve for the twin market failures of emitting carbon without penalty, nor attributing a value to technologies which absorb carbon. As governments and companies increase their commitments to a net-zero world, environmental markets can be the mechanism to help achieve those goals.’

Gordon Bennett Managing Director, Utility Markets, ICE

Unedited but shortened from TheCityUK, 39 page PDF for your convenience for download below:

London is continuing its push to become a hub for global carbon pricing.

See this report, ‘Global carbon pricing mechanisms and their interaction with carbon markets’, which shows how financial markets have adapted to value factors such as pollution and carbon sequestration, enabling firms and policymakers to quantify, manage and value the environmental impact of their activities.

With the use of environmental markets becoming more widespread and an increasing number of firms making net-zero commitments, the financial and related professional services industry is innovating in climate finance to allow for the effective allocation of resources into carbon projects that avoid, reduce, or remove carbon emissions.

One key area hampering the future development of carbon markets is the lack of robust, comparable data about the performance of carbon markets. More accurate and comprehensive monitoring will help to address this by improving general understanding of carbon markets and helping them to further scale.

Anjalika Bardalai, Chief Economist and Head of Research, TheCityUK, said, “Carbon pricing instruments lay the foundation for carbon markets, and these markets are an increasingly important tool to help meet net-zero carbon emissions targets. To the extent that we can quantify growth in this area given robust data are scarce, it is clear that carbon markets have experienced rapid growth in recent years, albeit from a low base.

“However, appreciation of the sophistication of instruments like cap-and-trade systems and carbon allowances is generally limited to a relatively small pool of subject-matter experts. Building a more widespread understanding of the role and importance of these markets will help government and society marshal the resources needed to meet the net-zero targets so important to combatting climate change.”

Gordon Bennett, Managing Director of Utility Markets at ICE, said, “Environmental markets provide the price signals to efficiently allocate capital across the carbon cycle and to manage the uncertainties in meeting net zero. Together, energy and environmental markets support an efficient transition from high to lower carbon energy generation, creating an asset class for carbon sinks and valuing factors like pollution, carbon sequestration and renewable electricity while incentivising behavioural change, and helping erode any additional cost of clean energy over fossil fuels.

“The UK is home to where the world’s energy and environmental markets – valued in the trillions – are cleared, as well as being a global leader in decarbonising electricity generation by combining market-based principles with thoughtful policy. The UK has a unique position to bring knowledge of environmental markets to a broader audience.”

The ‘Global carbon pricing mechanisms and their interaction with carbon markets’ report is the latest in a suite of research from TheCityUK on sustainable and green finance.