Carbon Trading: Markets, Challenges, Solutions
Key Takeaways
- CBAM entered its compliance phase on 1 January 2026, creating the world’s first carbon border tax on imported goods
- EU ETS carbon price is projected to average EUR 85/tonne in 2026 (+18% year-on-year), with coverage expanding as free allowances phase out
- The voluntary carbon market contracted 61% in 2023-2024 after integrity concerns, but is recovering with ICVCM Core Carbon Principles driving quality
- Over 91 bilateral agreements under Article 6 of the Paris Agreement are now active across 50+ countries
- ETS2, covering road transport and buildings, is expected to launch in 2027 with potential for the world’s highest carbon price by 2030
Carbon trading - the buying and selling of rights to emit greenhouse gases - remains one of the most powerful and contentious tools in the fight against climate change. Originally inspired by the success of cap-and-trade regulations in reducing sulphur pollution, carbon markets have grown into a complex global ecosystem. In 2026, that ecosystem is undergoing its most significant transformation since inception, driven by CBAM, expanding emissions trading systems, and a voluntary market that nearly imploded before rebuilding around integrity.
What Is Carbon Trading?
Carbon trading is a market-based mechanism that allows companies, governments, and other entities to buy and sell permits or credits representing the right to emit greenhouse gases. In compliance markets, a government sets an emissions cap and distributes tradeable allowances; companies that emit less than their allocation sell surplus permits, while those exceeding their cap must purchase additional ones. In voluntary markets, organizations buy carbon credits generated by emission-reduction projects (such as reforestation or renewable energy) to offset their own footprint. The global carbon market generated $104 billion in revenue in 2023 across 38 operational emissions trading systems.
The State of Carbon Markets in 2026
The global carbon market has evolved considerably since early estimates placed total trading value at approximately EUR 865 billion in notional volume. Revenue from carbon taxes and emissions trading systems reached a record $104 billion in 2023 and has continued to grow. Today, 38 operational ETS systems worldwide cover approximately 23% of global greenhouse gas emissions - roughly 12 GtCO2e annually.
Global Carbon Market Snapshot (2026)
| Carbon Market | Region | Emissions Covered | Carbon Price (2026) | Key 2025-2026 Development | Source |
|---|---|---|---|---|---|
| EU ETS | Europe | ~1.4 GtCO2e (~40% of EU emissions) | ~EUR 85/tCO2e | Free allowances reducing 2.5%/year as CBAM takes effect | ICAP 2026 |
| China ETS | China | ~5 GtCO2e (power sector) | ~USD 11/tCO2e | Expanding to cement, aluminium, steel sectors | ICAP 2026 |
| UK ETS | United Kingdom | Industrial + power sectors | ~USD 45/tCO2e | Aligning with EU ETS post-Brexit divergence | ICAP 2026 |
| California Cap-and-Trade | USA (CA) | ~80% of CA emissions | ~USD 35/tCO2e | Linked with Quebec, considering broader linkages | ICAP 2026 |
| Korean ETS | South Korea | ~73% of national emissions | ~USD 7/tCO2e | Underperforming on price signals | ICAP 2026 |
| CBAM (new) | EU border | Imports: cement, iron/steel, aluminium, fertilisers, electricity, hydrogen | Linked to EU ETS auction price | Compliance phase operational from January 2026 | European Commission, 2026 |
Sources: ICAP 2025/2026 Global Emissions Trading Status Report, World Bank State and Trends of Carbon Pricing 2025, European Commission.
CBAM: The Carbon Border Tax Arrives
The most consequential development in carbon markets is the EU’s Carbon Border Adjustment Mechanism (CBAM), which entered its compliance phase on 1 January 2026 after a two-year transitional reporting period (2023-2025).
CBAM requires importers of certain goods into the EU to purchase CBAM certificates reflecting the carbon price that would have been paid had the goods been produced under the EU ETS. It currently covers cement, iron and steel, aluminium, fertilisers, electricity, and hydrogen, with proposals to expand scope to downstream products.
Key features of the 2026 compliance phase:
- Financial obligations begin: Importers must now purchase CBAM certificates priced at the quarterly average EU ETS auction price
- Free allowance phase-out: EU ETS free allocations for CBAM-covered sectors reduce by 2.5% annually from 2026, reaching zero by 2034
- Carbon price deductions: Importers can deduct carbon costs already paid in the country of origin, creating incentives for non-EU countries to implement their own carbon pricing
- Simplified rules: October 2025 amendments reduced administrative burden as part of the EU’s Omnibus simplification package
CBAM is already influencing trade policy globally. Over 91 bilateral agreements or memoranda of understanding under Article 6 of the Paris Agreement are now active across more than 50 countries, as developing nations seek to establish carbon pricing instruments that would qualify for CBAM deductions.
Two Main Approaches to Carbon Trading
Cap-and-Trade (Compliance Markets): Governments set emissions caps and issue tradeable allowances. Companies that reduce emissions below their allocation can sell surplus allowances; those exceeding their cap must buy additional permits or face penalties. The EU ETS, the world’s largest, has operated since 2005 and serves as the model for most other systems.
Offset Markets (Voluntary and Compliance): Carbon credits represent verified emission reductions from specific projects - renewable energy, forest conservation, methane capture. Credits can be used for compliance purposes under some regulatory schemes, or purchased voluntarily by companies seeking to offset their emissions.
The Voluntary Market: Crisis and Recovery
The voluntary carbon market faced an existential crisis in 2023-2024 when analyses revealed that 50-90% of offset projects failed to deliver the emission reductions they claimed. Market size contracted by 61% as corporate buyers lost confidence and several high-profile projects were exposed as ineffective.
This reckoning triggered a decisive pivot toward quality. The Integrity Council for the Voluntary Carbon Market (ICVCM) established Core Carbon Principles (CCPs) as the new minimum standard, and buyers now prioritise credits that demonstrate additionality, permanence, and robust third-party verification. By 2025, project quality had measurably improved, with a clear market preference for credits delivering tangible environmental benefits.
ETS2: The Next Frontier
The EU is preparing to launch a second emissions trading system (ETS2) covering road transport and buildings - sectors that represent a significant share of EU emissions but have been outside the ETS framework. Originally scheduled for 2027, parliamentary discussions in November 2025 voted to consider postponing the start to 2028, reflecting political sensitivity around the impact on consumers.
BloombergNEF forecasts that ETS2 could generate the world’s highest carbon price by 2030 at EUR 149/tonne, given the limited abatement options in these sectors. The system will effectively put a price on fossil fuel heating and petrol/diesel for personal transport - a politically charged but climatically necessary step.
Investor and Consumer Challenges
| Challenge | Investor Perspective | Consumer Perspective |
|---|---|---|
| Integrity | Distinguishing high-quality credits from greenwashing remains difficult despite ICVCM standards | Limited transparency into whether offsets purchased actually deliver emission reductions |
| Complexity | Fragmented markets, varying standards, and multi-jurisdictional rules create compliance overhead | Carbon offsetting options are often confusing, expensive, and hard to evaluate |
| Data | Standardised emissions data and verification remain inconsistent across markets | Lack of clear information about carbon footprints and what effective offsetting looks like |
Addressing the Challenges
Standardisation and Integrity Frameworks: The ICVCM and VCMI (Voluntary Carbon Markets Integrity Initiative) have established buyer and seller-side integrity standards. Article 6 rules from COP29 provide a framework for international credit transfers with corresponding adjustments to avoid double counting.
Technology-Enabled Verification: Digital MRV (Measurement, Reporting, and Verification) platforms are using satellite imagery, IoT sensors, and AI to provide continuous, verifiable emissions data - replacing periodic manual audits.
Platform Infrastructure: The Aerapass platform incorporates features designed for carbon market participants, including passporting for seamless cross-border trading, scalability for high-volume trading, and interoperability with both fiat and digital currencies. Robust compliance and regulatory features support the increasing regulatory requirements of carbon market participation.
Looking Ahead
Carbon markets are entering a new phase of maturity. CBAM is creating real financial incentives for global carbon pricing. Voluntary markets are rebuilding around integrity. ETS2 will bring carbon costs to sectors that affect every consumer. For investors, the complexity creates both risk and opportunity - and the platforms that can navigate multi-jurisdictional carbon trading with transparency, compliance, and efficiency will define the next era of climate finance.
Summary
Carbon markets are consolidating around three developments: CBAM is creating the first enforceable link between carbon pricing and international trade, ETS2 will extend carbon costs to transport and buildings by 2027-2028, and voluntary markets are rebuilding under ICVCM integrity standards after their 2023-2024 crisis. The global carbon market now covers 23% of emissions through 38 operational systems generating over $104 billion annually. For institutional investors and commodity traders, multi-jurisdictional carbon trading requires platforms that combine compliance infrastructure, cross-border settlement, and support for both fiat and digital currencies.
Frequently Asked Questions
What is CBAM and how does it work in 2026? The Carbon Border Adjustment Mechanism (CBAM) is the EU’s carbon border tax, operational since 1 January 2026 after a two-year transitional period. Importers of cement, iron/steel, aluminium, fertilisers, electricity, and hydrogen into the EU must purchase CBAM certificates priced at the quarterly average EU ETS auction price. Importers can deduct carbon costs already paid in the country of origin, incentivizing non-EU countries to establish their own carbon pricing systems.
What is the EU ETS carbon price forecast for 2026? The EU ETS carbon price is projected to average approximately EUR 85 per tonne of CO2 equivalent in 2026, an 18% increase year-on-year (ICAP 2026). Free allowances for CBAM-covered sectors are reducing by 2.5% annually from 2026 and will reach zero by 2034, which is expected to sustain upward price pressure.
What is the difference between cap-and-trade and carbon offset markets? Cap-and-trade (compliance) markets operate under government-mandated emissions caps, where companies trade allowances within a regulated framework. Carbon offset (voluntary) markets allow organizations to purchase credits from verified emission-reduction projects without regulatory obligation. Compliance markets generated $104 billion in 2023 revenue and cover approximately 23% of global emissions; voluntary markets contracted 61% in 2023-2024 after integrity concerns but are rebuilding under ICVCM standards.
When does ETS2 launch and what will it cover? ETS2, the EU’s second emissions trading system, is expected to launch in 2027-2028 and will cover road transport and buildings - sectors currently outside the EU ETS framework. BloombergNEF forecasts ETS2 could generate the world’s highest carbon price at EUR 149/tonne by 2030, given limited abatement options in these sectors.
Is the voluntary carbon market recovering? Yes. After contracting 61% in 2023-2024 due to integrity failures (50-90% of offset projects failed to deliver claimed reductions), the voluntary market is rebuilding. The Integrity Council for the Voluntary Carbon Market (ICVCM) established Core Carbon Principles as minimum standards, and buyers now prioritize credits demonstrating additionality, permanence, and third-party verification.
References
- ICAP (International Carbon Action Partnership). Global Emissions Trading Status Report, 2025/2026.
- World Bank. State and Trends of Carbon Pricing, 2025.
- European Commission. CBAM operational guidance and compliance requirements, January 2026.
- European Commission. EU Omnibus simplification package, October 2025.
- BloombergNEF. European Carbon Market Outlook, 2025. ETS2 price forecasts.
- ICVCM (Integrity Council for the Voluntary Carbon Market). Core Carbon Principles framework, 2024.
- VCMI (Voluntary Carbon Markets Integrity Initiative). Claims Code of Practice, 2024.
- UNFCCC. Article 6 bilateral agreements tracker, COP29 update.
The content on this page is produced by Aerapass for general informational purposes only and does not constitute financial advice, investment advice, or any other form of professional advice. Aerapass is a technology platform provider serving financial institutions, wealth managers, and fintech companies. Before making any financial decision, you should consult with a qualified, licensed financial advisor who can take your individual objectives and circumstances into account.
