Annual Market Rankings 2022

Carbon markets ride out energy crisis

Global carbon markets have proved resilient, despite a year of global uncertainty, winners of this year's Market Rankings told Genevieve Redgrave

Following record high carbon prices in 2021, the energy crisis and policy uncertainty throughout 2022 has stalled the rapid growth previously seen in global carbon markets.

EU Allowance prices began the year trading at €83 ($87) and reached record high prices of €96 in February. After sharp drops in March and September, the price of EU allowances recovered to €88 as of 7 December.

However, uncertainty remains as the market looks for clarity from the EU on the reform and expansion of its Emissions Trading System (ETS).

Despite not seeing as much volatility on pricing, uncertainty also played its part in the North American markets as states decide how to take their carbon markets forward. The Regional Greenhouse Gas Initiative (RGGI) saw changes to the list of states that form its membership, while California is also looking to ramp up the ambition of its cap-and-trade market.

China also failed to see significant movement over the year, as allowance oversupply kept prices low. However, recent regulatory decisions mean a significant expansion could be coming soon.

Despite the ongoing uncertainty in many of the major carbon markets, winners of the 2022 Market Rankings told Environmental Finance they are optimistic that 2023 will see some welcome stability and certainty.


"A lot of the uncertainty around war, energy prices, recession and political changes has helped keep a lid on prices this year, as markets don't generally like uncertainty," said Tom Lord, head of trading and risk management at market consultancy Redshaw Advisors, summarising the fortunes of the EU ETS.

Redshaw Advisors won two awards – Best advisory/consultancy in both the EU and UK carbon markets.

According to Lord, "the biggest shock to the market in 2022 was the war in Ukraine, which caused a short-term sell off, flushing out the speculative length that was in the market".

EU carbon permits dropped from €94 on 23 February to €57 in the following two weeks, in the wake of the initial Russian invasion.

Over the summer months, the amount of utility hedging dropped considerably, which winners suggested was because of 'liquidity concerns'.

Michael Karavias, managing director of derivatives and structured products for Evolution Markets, which won six awards covering the EU, UK, North American and Kyoto markets, said that utilities and trading houses attempted to "move their positions into futures or reduce their holdings".

Stefan FeuchtingerStefan Feutchinger, head of market research and development at Vertis Environmental Finance, said utility hedging is often the most important factor in making the carbon price move. When hedging slowed down, it therefore impacted the price of EUA quite considerably, he said.

This brought prices down to lows of €66 in September, from €97 in mid-August.

Vertis Environmental Finance won Best trading company, spot and futures for both the EU and UK markets. Vertis earlier this year became part of the STX Group, which also won the award for Best trading company, options in the EU.

Feutchtinger added that the latter half of the year, was the first time since data first started being collected that the EU allowance markets "saw funds being short, and the short squeezes in October and November were quite brutal".

These market movements coincided with major developments on EU policy. As part of its 'Fit for 55' package, the European Parliament has been reviewing the scope of its ETS to ensure it will help reduce emissions by 55% by 2030.

The European Parliament said the review will decide if the supply of emission allowances will be reduced and if fewer allowances will be allocated for free. The internal review is ongoing, but some measures have already been announced. This includes the decision to bring intra-European and some non-EU flights and maritime shipping into the trading scheme.

Gordon Bennett, managing partner of utility markets at the Intercontinental Exchange (ICE), which won Best exchange in the EU and Kyoto project credit market, said: "We are already seeing international companies trade EUAs in anticipation of shipping inclusion from 2024, using our future markets for exposure before registry access becomes available."

It is expected that further ETS reform will be announced before the end of 2022.

At the same time, the EU has been building out its REPowerEU programme to reduce its reliance on Russian fossil fuels by improving access to renewable energy. It has been suggested that as much as €20 billion could be taken from the carbon market's stability reserve to help finance these plans.

Redshaw's Lord said, while elements of the proposal are still to be decided, this "may well weigh on prices next year".

Vertis' Feuchtinger suggested, however, that this might not have a significant effect on prices. "The uncertainty over REPowerEU legislation caused volatility when it came out initially in May, but now I would be surprised if the market reacted significantly to it, as it has already had a chance to price it in," he said.

Despite the volatility of the past year, the ongoing reform of the ETS to ensure it is ambitious enough means the market is "more or less on the timeline that was expected a year ago", Feuchtinger said.

He suggested that, as we move into 2023 and greater clarity is provided by EU policymakers, this will help drive the market forward.

"The ETS reform currently underway won't be applicable next year but the mere fact the rules, the fundamentals and sentiment are already outlined, will bring more ambition to the market," he argued.

This, however, will "be balanced with fears of a recession. I expect this will create a base case where the price doesn't go above €100 or below €50," he added.

Redshaw's Lord agreed that prices could be hit "if countries are feeling the pain through winter, or recession bites harder than people are expecting".

"A lot of people have pulled away from markets that aren't their core focus because of the uncertainty," Lord added. "Many industries don't have spare cash, so they will cover themselves for compliance but perhaps nothing more."

He agreed, however, that the EU market will eventually see further ambition, which will result in more products and a "broadening of the markets".

While the recession looming over the continent was undoubtedly still a concern, winners were optimistic that this will not have the same effect on the market as previous recessions have had. During the global financial crisis, EU allowance prices crashed to around €10 as power generators and industrial firms sold off credits because of reduced production and liquidity concerns.

Vertis' Feuchtinger argued, however, that the predicted recession would "have to be quite deep to be a serious threat to the carbon price in Europe" because of a mix of factors "such as increased power emissions and EU legislation".

He added: "The big question now heading into next year is [about] when hedging is going to start again".

"You can assume some will come back to the market next year but hedging probably won't come back very aggressively at once, rather in stages. From a risk perspective, it would definitely make sense to go slowly and keep a close eye on the winter."

He also questioned "how funds will position themselves next year and if we see any of this short behaviour continue".

ICE's Bennett believes the short positioning is likely to continue: "A trend we expect to observe is the increased use of our EUAs as margin cover for net short EUA positions, which is pending final regulatory approval".

Under ICE's emissions futures contracts, traders are required to settle their EUA position each month. In September, it announced it was changing its rules to accept EUAs as collateral to cover 'short positions'.

Bennett explained: "This is being done to provide market participants with more flexibility regarding the assets they provide to the Clearing House as margin cover, as well as assisting the energy markets with the current liquidity pressures".

Despite ongoing uncertainty, winners were optimistic that more stability is likely for the EU ETS in 2023, especially towards the second half of next year as policy is finalised and the energy crisis hopefully begins to ease.

Lord concluded: "Prices could struggle to move much higher in the coming year but, if the war or recession ends earlier than expected, this could all change. The long-term outlook remains bullish."


Despite the UK now having a separate ETS following its departure from the European Union, the two markets continue to trade in similar ways.

"The market is still very much correlated with the EU," Vertis' Feuchtinger said, "and as long as there is an assumption they might link again the future, we're going to continue to see them trade in a very aligned way."

Although less fundamental in scope, the UK is also reviewing its ETS. In March, the government published a consultation paper on developing the system further, which could include broadening its sectoral coverage and including methane emissions in its scope.

A final response to the review is expected soon, which will outline the next steps for the system and how it could be aligned with the national 2050 net zero target.

However, with the process still ongoing, Redshaw's Lord said: "I don't see any answers on the ETS reform coming soon."

In the meantime, the UK allowance market is continuing to grow as an entity in its own right. ICE's Bennett said: "The UKA market continues to build out its position as the third largest carbon market" on the ICE, and it is seeing "an increase in participation from all sectors of the economy, including entities not mandated by the UK government to pay for their pollution".

Over 140 firms are now trading allowances on ICE, he explained, and in December the exchange experienced a daily volume record.

Bennett added: "The market's first option contract traded on launch in October, which reflects a growing appetite for more sophisticated risk management products". He said this was a trend ICE saw when the EUA market was maturing.

Investors "continue to seek access to both [EUAs and UKAs], as evidenced by the increase in ETF issuance", he said.

Some winners suggested that UK allowance prices may trail their European counterparts, as seen in November, because of fears over a longer recession and therefore reduced industrial output, and that macroeconomic uncertainty may continue to be felt by the UK markets for longer than in the EU.


Randy LackNorth American carbon markets also didn't escape the impact of the energy crisis, but winners explained this was on a shorter-term basis than in Europe.

Randy Lack, head of portfolio management for Anew, which won five awards in the North American markets, said: "There was collateral impact from the Russian invasion of Ukraine that carried over from the EU ETS pricing, that then carried over into the California and Regional Greenhouse Gas Initiative (RGGI) markets.

"But after the initial 20-day shock, the markets recovered pretty quickly," he said. Lack further argued that "sentiment does bleed through from the European markets, especially on the trading side, so you see these shocks to the market that occur even from uncorrelated events".

But Jonathan Burnston, managing partner at Karbone, which won Best broker, options for the North American market, argued that, while voluntary carbon markets are heavily sensitised to risk appetite at large, "compliance markets are a bit more siloed".

He said: "In riskier times, compliance markets sometimes outperform [voluntary markets] which was very much the case in 2022".

US compliance markets, he said, have been "basically flat" for the year. "But in juxtaposition to the volatility in the voluntary carbon market, simply holding your price over the year looks pretty good."

He added that the process of decarbonisation has so much momentum that, despite incentives in the energy market, there was not much switching back to coal, which would have increased demand for carbon allowances and driven up prices. He said: "Decarbonisation is not simply going to [allow us to] turn back to coal instead of gas".

Jonathan BurnstonSimilarly to Europe, both RGGI and Californian markets faced policy uncertainty. In September, Virginia announced plans to withdraw from RGGI, citing research from its Department of Environmental Quality that found the system is increasing electricity prices and creating a "bad deal for residents".

The initiative faced more upheaval when Pennsylvania announced its intention to join. The state has been hit by lengthy court battles over suggestions by critics it is an 'unconstitutional tax'. The Pennsylvania Supreme Court is still deciding on the matter.

California is also set to adopt its final 'scoping plan' before the end of the year, looking at how to accelerate its move towards carbon neutrality. As part of this, the state's Air Resources Board will review its annual allowance caps next year to see if these need to be reduced to accelerate emissions reduction.

"Once targets have been achieved, the only way to keep the programmes relevant is to drag targets forward in time, like has already been done in California's low carbon fuel standard," Karbone's Burnston said. The fuel standard uses a credit system similar to its carbon allowances to decrease transport carbon intensity.

Anew's Lack explained, however, that "the current expectation is that there won't be any significant revisions to the [cap and trade] programme in the near term that will affect the price".

He said: "There is tolerance in California for higher carbon pricing, but that would need to happen legislatively, so we should expect to see continued attention on areas such as more market support and the existing bank of credits in next year's legislative session".

While "we'll be hard pressed to see something get done in 2023, we could see it in 2024", he added.

Michael BerendsHowever, Michael Berends, CEO of ClearBlue Markets, suggested the target to bring emissions down quicker in California will be carried through to the cap-and-trade formally next year. He "expects market signals to firm next year as the Air Resources Board proposes these revisions".

ClearBlue Markets won three awards for the North American and Chinese markets.

Alongside RGGI and California, October also saw Washington state set up its own cap and trade system. Set to launch on 1 January, it will cover 75% of the state's largest emitters.

Berends believes that "Washington appears poised to start out pretty tight in terms of balances, and this should be reflected in the pricing".

The system has been modelled on the California cap-and-trade scheme but Washington has also introduced a further requirement to monitor air pollution and air quality improvements.

The Washington Department of Ecology said the Washington and Californian programmes may eventually be linked. California's system is already linked with Quebec's, so allowance auctions are held jointly.

Lack argued, however, that "the emergence of individualised market state approaches is not ideal. Ultimately, we will need federal regulation to create the impact we need within these markets, but as more states go out alone it will be harder to bring them back into a uniform market".

Federal unification is highly unlikely, however, in the next year, he said, because of the split Congress following elections earlier this year.

"There will be a time where there's a lot of motivation on both sides of the aisle to come together to find a solution," he forecast.

Karbone's Burnston agrees that, as decarbonisation continues, there will be a ramping up of ambition. "For any sectors that don't already fall under some sort of carbon constraint, this will undoubtedly happen at some point – but it's hard, as the low hanging fruit has already been done", he said.

"Next up is transportation fuels through government-imposed compliance programmes and self-imposed targets. From there it is industrial emissions, but this won't necessarily happen in the short term," Burnston suggested.

Anew's Lack suggested that the markets are already mature and are not ripe for innovation. He said: "There are great products that are already exchange-traded, people are trading puts and calls spreads, so we have a lot of activity and a decent amount of liquidity. So, I don't think these markets are ripe for innovation".

Berends said any exchange-traded products are likely to be aimed at retail investors, "as the carbon markets receive more attention from the general public".

"These exchange-traded funds will help channel funds from the general public into the carbon markets, in contrast to large, sophisticated investors being the main trading forces within the market".


Since the launch of China's national carbon emissions allowance in July 2021, the price has not fluctuated significantly.

It has priced between ¥40-60 yuan consistently and hovered around ¥58 ($8.2) for the last few months.

It is already the world's largest carbon market. Currently only covering the power sector, the ETS comprises of 2,224 coal and gas fired power plants which is equivalent to roughly 40% of national emissions.

In November, the Chinese Ministry of Ecology and Environment launched a public consultation on the expansion of the market. This sets out plans to allow less emissions per unit of power generated.

However, the Chinese market has been criticised for the oversupply of emissions allowances, which is keeping prices low.

It remains to be seen if the proposed reduction in emission allowances will be significant enough to drive prices up. This change is also not due to come into force until 2024, so significant price changes as a result of this are not expected in the next year.

ClearBlue Markets' Berends explained that more sectors are also being considered and officials plan that by 2025 all high emitting sectors are to be included in the system. These sectors are: petrochemicals, chemicals, building materials, iron and steel, non-ferrous metals, papermaking, power, and aviation.

China is also now pivoting its covid strategy after two years of lockdowns led to protests. Berends said: "Reopening would drive the overall economy and therefore emissions, so we would again see a potential uptick in the pricing as industry and utilities ramp up operations".

Berends added that there have also been reports of a "Hong Kong-Mainland connect in carbon trading". The Hong Kong Exchange, he said, is reported to be exploring how it can "leverage its status as a financial hub to allow foreign investors access to China's ETS".

He said: "Further development will be closely watched in 2023 and beyond".