Annual Market Rankings 2021

Carbon prices soar in bullish year

Prices in some of the main carbon markets have hit record highs, writes Madeleine Jenkins

Carbon prices hit new records over the past year as speculation in global cap and trade schemes ballooned.

North American markets have seen prices almost double. At the start of November, Californian carbon futures jumped up by 90% in value over the previous five months, having fallen back to a 75% increase in recent weeks. In November, the median allowance price was $34.00, compared with $17.3 last November. On the US East Coast, Regional Greenhouse Gas Initiative (RGGI) futures have also gone up by 60% and September auction prices have climbed from $6.8 to $9.3 since last year.

Since last November, European emissions allowance prices tripled, hiking to €72 ($81) a tonne, up from €23 ($27) per t/CO2e.

China launched its Emissions Trading Scheme (ETS) after four years of waiting and found a pricing equilibrium at $6.

Following the volatile year of trading in 2020, regional compliance markets were boosted as economies unlocked during vaccination roll outs across the global north, and focus on environmental issues increased.

Environmental Finance spoke with the winners of the 2021 Market Rankings to see how the events of the past year have impacted their regional carbon markets, and what they predict for the year ahead.

Courtesy of Intercontinental Exchange, ICE Exchanges & Clearing.


In North America, buyers have become increasingly bold. According to Randy Lack, founder and co-president of Element Markets, allowances are now viewed as a "good investment".

Lack says: "There is no carbon market that's down. Carbon is a new currency that is being invested in by every energy group."

Randy LackElement Markets won both Best trading company, spot & future and Best trading company, options in the California market and Best trading company in RGGI. The Californian and RGGI markets are the predominant compliance markets in North America.

This year, Element Markets was acquired by the Rise Fund, the largest impact fund in the world. It was founded in 2016 by Bono and Jeff Skoll, with $5 billion in assets under management.

Nicolas Girod, founding partner at ClearBlue Markets, notes that while US markets were up, they were still "lagging" in comparison to Europe.

ClearBlue Markets won Best advisory/consultancy in three markets: China, California and North American (all).

Gordon Bennett, managing director of utility markets at ICE, says: "At the moment, we are seeing some headwinds which are associated with the impact of high energy prices, for example several states in the US have withdrawn from the Transport and Climate Initiative, citing amongst other reasons "high gasoline prices", leaving only Rhode Island and Washington D.C.

The Transport and Climate Initiative is a regional collaboration of 13 Northeast and Mid-Atlantic states and the District of Columbia that seeks to limit greenhouse gas (GHG) emissions from motor vehicle fuel sources using a cap and trade system on wholesale suppliers.

"Governments need to be bold and focus on the long term goals rather than be distracted by the short term impact of high energy prices, but these are clear examples of the political challenges of transitioning to Carbonomics from Economics."

Bennett adds: "Another interesting trend that has been gathering steam this past year is the flow of money into carbon exchange-traded funds (ETFs).

"According to estimates, there is c.$2 billion of AUM in carbon ETFs, showing the investor appetite for exposure to this asset class, as well as another indicator of how carbon is moving into the mainstream."

ICE won Best exchange/clearing house in the UK and EU markets.

Christie Pollet YoungChristie Pollet-Young, director of the GHG verification programme at SCS Global Services (SCS), observed that in more conservative states of the US carbon trading was still considered "nice to have, rather than a must-have".

SCS won Best verification company in North America.

California's ETS has been formally linked with Québec's system since January 2014. This year, says Lisa DeMarco, senior partner and CEO at Resilient LLP, Nova Scotia indicated its intent to link its scheme with California's.

Resilient won Best law firm in North America (all markets).

Scheduled to start in 2023, Mexico's ETS is highly anticipated. Canada-based DeMarco says: "There has been discussion about linking with California, which is linked to Quebec. Nova Scotia has also indicated that it is considering linking with the WCI jurisdictions."

DeMarco welcomes the news: "Harmonised pricing regimes are wise."

At COP26, the California Air Resources Board (CARB), which implements the California programme, signed a Joint Declaration with the governments of New Zealand and Québec. The declaration committed the parties to cooperate on "information, experiences, and best practices on the implementation" of cap-and-trade schemes for GHG emissions, as well as measurement, reporting and verification systems, sustainable mobility, forestry and agriculture.

Meanwhile, Pennsylvania is also in the process of establishing a power sector ETS and possibly participating in the RGGI programme by 2022. RGGI's jurisdictions include Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont and Virginia.

Virginia joined RGGI in January 2021. The state had started regulatory processes to participate in RGGI in 2018. However, the Republican house majority pushed through legislation that prevented Virginia from joining in 2020. Following the November 2019 elections, cap-and-trade legislation was introduced by the new Democratic majority in 2020.

In the California market, the growing number of corporate net-zero commitments as well as demand from European investors and fund managers caused prices to increase by 30%, with most activity beginning in the last six months.

CARB put California's ETS under mandatory review in a 'scoping plan' this year. CARB decided that, from now on, no more than half of the offset credits that an entity surrenders for compliance can come from projects that do not provide Direct Environmental Benefits in the State (DEBS).

This year, RGGI also finalised the '2017 Model Rule'. RGGI states are now committed to reduce power sector emissions by 30% compared with the 2020 CO2 emissions cap.


According to CF Partners, there has been "massive, unprecedented energy market volatility" in the second half of 2021, which has put a renewed focus on "risk management strategies and clients' exposure to future carbon prices".

Tim Atkinson, director of sales and structuring at CF Partners, says: "The cost of carbon has more than doubled since the start of 2021, which has caught a lot of market participants by surprise.

"If companies haven't planned for this, then there is a big budget gap to fill, especially given the significant reductions in free allocations under EU ETS Phase 4 and the new UK ETS..."

CF Partners won Best broker, spot & futures (UK), Best trading company, options (EU) and Best broker, options (EU).

"The cost of carbon has more than doubled [in the EU] since the start of 2021, which has caught a lot of market participants by surprise" Tim Atkinson, CF Partners

Tom Lord, a trader at Redshaw Advisors, says: "Higher prices are forcing European investors to take a more proactive approach.

"Not to say this holds for everyone, but the attention is now coming top-down – from CEOs and CFOs, and so on."

Lord adds: "[The EU market] has become thinner. We've seen more moves based on lower volume, and it tends to be very jumpy. This isn't a good thing in terms of cost.

"But, the EU ETS still has very good liquidity, so it's not a serious concern; that growing interest from investors is still there – I don't see that interest waning."

Lord predicts there will be a cap-change in the EU, as well as the creation of a Carbon Border Adjustment Mechanism (CBAM). CBAM is the most controversial proposal in the EU's Fit for 55 scheme. It proposes a levy on imports of specific products, to create a level playing field for EU producers.

Andrew Hedges, a partner at law firm Baker McKenzie, says: "The 'Fit for 55' proposals from the Commission, particularly the proposed CBAM, has focused the attention of significant emitters on the potential for significant price exposure in coming years.

"Combined with the other green deal initiatives of the EU and UK, there is a growing possibility that compliance markets may start to support significant investments in emerging alternative technologies, such as hydrogen.

"For European markets, the key focus is on the passage of the 'Fit for 55' proposals, including the tightening of the EU cap, the extension of the EU ETS to the shipping sector and the proposed phase-in of a CBAM.

"In the UK there are similar issues, as market participants assess the ongoing approach of the UK government to implementing its enhanced targets.

"Generally, the underlying structure of the European emissions trading market (such as registry systems, security protocols to protect against fraud, and MRV process) are generally considered mature. As the value of allowances increases and emitting sectors look to do more innovative financing structures, the uncertainty in many markets of how to take and enforce security over existing and future allocations of allowances is being considered."

Baker McKenzie won Best law firm in the EU, UK, China and Kyoto project credits (JI and CDM) categories.

Element Market's Lack says: "I've seen a lot of activity of portfolios trying to manage on a weekly or monthly basis as opposed to a yearly basis...investors are starting to see the much bigger picture of the net zero ambition."

Fit for 55

In July 2021, the European Commission released the "Fit for 55" package – an intermediate emission reductions targets of at least 55% below 1990 levels, in line with its carbon neutrality goal of 2050.

The package – which is yet to be finalised by the Council of the EU and the European Parliament – includes policy proposals for the main sectors of the economy. It prioritises the EU ETS in the EU's decarbonisation agenda while significantly changing it:

  • a one-off reduction to the cap and increased linear reduction factor (from 2.2% to 4.2%);
  • the inclusion of the maritime sector into the EU ETS' scope from 2023 onwards;
  • a separate fuel ETS for buildings and transport;
  • strengthened benchmarks and a faster phase down of free allocation which would be tied to low-carbon investment by the receiving entity;
  • the introduction of a carbon border adjustment mechanism (CBAM) that prices imported goods based on their embedded emissions to become fully operational by 2026;
  • updated parameters of the Market Stability Reserve (MSR), including a new buffer threshold and an extension of the current intake rate of 24% beyond 2023;
  • and new regulations around revenue use to address distributional effects and spur innovation, including the creation of the Social Climate Fund.

By 2030, at the end of the Fit for 55 package, experts expect the price of carbon to be well over €100.


Since its divorce from Europe, carbon prices between the UK and the EU remained united until May, when UK ETS auctions began on 19 May 2021.

As of 25 November, UK carbon allowances were trading at a £7 ($10) premium, compared with the sterling equivalent price of EU allowances.

The two markets price carbon higher than in other regions as they are driven by more ambitious emissions targets.

Redshaw's Lord says the EU ETS still has very good liquidity and growing interest from investors, but the UK market is the "polar opposite".

Lord explains: "The UK ETS has poor liquidity and poor volume. The bid offer spread is very wide and moves on low volume."

"The secondary market is almost starved of allowances. The only natural seller is the government, and that's every two weeks."

Redshaw won Best trading company, spot & futures and Best advisory/consultancy in the UK markets.

CF Partners' Atkinson echoes Lord's appraisal: "There is significant demand for UK allowances, but there isn't much supply outside of the auctions."

He adds: "It was always going to be tough starting a new carbon market in the midst of a carbon price rally.

"Not surprisingly, the UK allowance price initially took direction from the benchmark EU carbon price, a trend helped by UK utilities rolling any EU allowances purchased in the first six months of 2021 as a proxy hedge against their UK ETS exposure, into UK allowances."

Following the start of UK ETS auctions and the UK carbon market in May, Lord and Atkinson observe that utility operators began selling any EU allowance holdings and buying UK allowances.

Atkinson says: "In September we did see a real disconnect of the UKA-EUA price correlation, with UKAs reaching a record high of over £75 per tonne, nearly £20 higher than EUAs. This was because of a fairly unique set of circumstances – very high UK power prices resulted a strong UKA demand from thermal generators, at a time where there was a gap in auctions and limited secondary market supply.

"It does highlight a concern that market liquidity is poor and UKA prices can rocket higher in periods of significant demand."

Lord agrees: "Coal-powered generation has increased markedly in the UK recently. With cold weather forecast to continue this winter, it is likely it will increase."

On 6 October, the UK ETS auction was only partially cleared, with about one sixth of allowances remaining unsold. Allowances were sold at the auction clearing price of £60.

Lord explains that this happened due to high prices and the market's novelty. He added: "Most traders only got a month's notice of the auction beforehand."

Looking ahead, Lord says: "We see that price gap [between the UK and the EU] widening as everyone comes to square away their compliance obligations. We warned the government of UK price spikes prior to Brexit, and believe that is still a risk."
CF Partners' Atkinson adds: "It's definitely a concern for UK operators, as they're currently paying higher carbon costs than their EU counterparts.

"There is no quick fix to the liquidity issues unless the UK and EU commit to their stated ambition to link the two schemes. Unfortunately, to date, we've not seen the political will to make this happen.

"I'm sure there will be pressure from industrials in the UK and it will be interesting to see if and when the government do take action on this."

The UK formally withdrew from the EU on 31 January 2020 but continued to participate in the EU ETS until the end of the year as part of the transition period. In parallel, the linking agreement between the EU ETS and the Swiss ETS entered into force in January 2020. A provisional link was established in September, enabling allowance transfers between both registries on pre-announced dates.

Lucideon CICS is a subsidiary of the international, UK-based Lucideon Limited, a global materials analysis and consultancy company. Post-Brexit, it formed a new additional subsidiary company based in Ireland – Lucideon CICS Ireland – in order to continue trade with European clients.

Shaun Bainbridge, director of Lucideon CICS, described the process as "a hassle".

Lucideon won Best verification company in the EU.

China ETS

The Chinese ETS was launched this year, after four years of waiting and seven years of government preparation.

Resilient's DeMarco says the launch was "well received", as "the demand in that market is massive".

There has been no indication that foreign or individual investors will be allowed to participate in the national ETS.

Initially, the Chinese ETS has only included the power sector, comprising 2,225 coal-and gas-fired power plants. DeMarco predicts it will expand into industrials, to "facilitate a greener growth" due to China's net-zero by 2060 commitments.

In September 2020, President Xi Jinping committed China to achieve peak carbon emissions before 2030 and carbon neutrality by 2060. According to the International Carbon Action Partnership (ICAP), this generated "great momentum" for the development of the national ETS, kickstarting it in 2021.

Nicolas GirodClearBlue's Girod says: "We have witnessed prices finding a new equilibrium price at around 43CNY, which is equivalent to $6.7, prior to the first compliance surrendering taking place on 15 December. The activity remains low, however, and investors are not yet allowed in the market."

The two ETS exchanges are in Shanghai and Hubei. Beijing and Guangzhou have trading centres for China Certified Emissions Reduction (CCERs) and carbon futures, respectively. Shenzhen, Tianjin, Chongqing and Fujian also have regional pilot schemes, which function in parallel.

Girod adds: "The news that Chinese CERs would be eligible for the 2019-2020 compliance period spurred a flurry of activity and was seen as a positive and has increased interest in this market. In terms of investors, as mentioned, it is currently not possible for outside investors to participate in the market, but this could change.

"The Guangzhou Futures Exchange is expected to launch in the new year a future contract, which could eventually give access to the Chinese market to investors. This will be a key event for the market and we expect this to increase the number of participants."

Article 6

In November, the UK hosted COP26 in Glasgow. After six years of waiting, new rules of carbon trading were finalised under Article 6 of the Paris agreement.

While excitement has grown in the voluntary carbon markets, Element's Lack says in the compliance markets: "It was an installation of confidence, but it was already being priced in."

Gordon Bennett"We saw a huge price increase going into COP, but this spike has been consistent...from a market perspective, most people expected it would get done. But it's an important signal of how we'll be dealing with adjustments and registries."

ICE's Bennett said: "One point missing from the narrative is that the focus is very much on 1.5֯ C now, whereas Paris was about substantially below 2֯ C. No one talks about 2֯C anymore. This is a positive development."

Following the Article 6 agreements, S&P Global predicts the carbon market of the future is expected to be made by one single emission unit, which will be used for different claims depending on the extra labels or certificates it carries.

Redshaw's Lord says: "That's what you're aiming for, but whether you're going to get all states signing up to that seems very unlikely."
Ilona Millar, a partner at Baker McKenzie, said: "I would expect that the future carbon market will have a much greater level of fungibility of units – provided they all meet core underlying characteristics and what the TSVCM (Taskforce on Scaling Voluntary Carbon Markets) have called core carbon principles.

"However, I do not see this merging into a single unit, as it is the prerogative of regulators and standard-setters to set their own frameworks for project registration and unit issuance.

"This is particularly the case with units that serve national/subnational compliance and voluntary markets, but also voluntary standards that look to differentiate themselves in the market.

"The extra labels will become increasingly important for some (but not all) buyers, particularly those seeking to demonstrate their additional contributions to the UN's Sustainable Development Goals."

Millar added: "I think it is a very exciting time to be involved in the next generation of carbon markets.

"If history is anything to go by, the newly agreed Article 6 Rules will see a number of market players – including multilateral development banks, sovereigns and corporates – test the new rules and processes in the next year or two and take advantage of early mover opportunities.

"However, I also expect to see continued volatility in the carbon market, linked to more active secondary market trading and also to new approaches to digital trading and tokens."

"There is no carbon market that's down. Carbon is a new currency that is being invested in by every energy group." - Randy Lack, founder and co-president of Element Markets.

Internationally, further agreements to link regional emission trading schemes under Article 6 of the Paris agreement have caused experts to hope for further harmonisation of compliance carbon markets.

Following the approval of Article 6 at COP26, the governments of Georgia, Vanuatu, and Dominica each signed carbon trading plans with Switzerland. The ETS linkages allow the former countries to fund sustainable development projects, while Switzerland counts the projects as part of meeting its emissions reduction obligations under their nationally determined contribution (NDC).

The countries joined Peru, Ghana and Senegal, which also signed bilateral agreements with Switzerland within the last year.

ClearBlue's Girod predicts that, overall, the compliance markets will become "more global, as opposed to being less local".

But Redshaw's Lord disagrees: "I don't think you could see a lot of evidence of that. But governments signing up to more ambitious commitments means more carbon trading is involved, and larger ETSs are good for everyone. Smaller ETSs, such as South Korea and the UK, are good examples of that.

"Climate change is something that requires cooperation."

Looking ahead

Market participants are upbeat about the prospects for pricing.

Element's Lack says prices have further to rise in the US: "What we're seeing is speculative investment, and we'll see higher prices ahead."

"The market has dried up in terms of volume," Lack adds. "It's very hard for the market to respond quickly, it takes many months. The response time is much slower than you would expect."

When asked whether the speculation felt dangerous, Lack says: "It doesn't feel that way."

ClearBlue's Girod adds: "We've seen speculation, but in Europe there isn't excessive speculation."

Resilient's DeMarco says: "Volatility is a tough one to call. The net increase trend is there, but I don't think we're in danger of any bubbles forming at the moment."

Jonathan BurnstonBut Jonathan Burnston, managing partner at Karbone, described the markets as "frothy", and "flush with capital...possibly too flush."

"This is the latest round of non-stop stimuli rounds from banks since 2008. You could say the flow of capital got down to a trickle during Covid, but now it's a gush.

But where is the flow going to go? Liquidity is what matters for investors.

"I see no stop to it. Irrespective of Article 6 [of the Glasgow climate pact], these trends won't stop and they'll continue to grow."

Burnston adds: "I am bullish going into 2022...because the runway from conceptual to commercial and scalable always continues to shrink.

"Solar happened faster than wind, battery happened faster than solar, and hydrogen, biofuels and sequestration will happen faster than battery. It's a self-reinforcing logic."

Karbone won Best broker, secondary market in Kyoto Project Credits (JI And CDM) category and Best broker, spot & futures in California.