Compendium

Carbon Markets & Compliance — Cap-and-Trade, Offsets, CBAM, Voluntary Markets

22 min read

Carbon Markets & Compliance — Cap-and-Trade, Offsets, CBAM, Voluntary Markets

Carbon markets price the negative externality of greenhouse-gas emissions through two principal mechanisms: a carbon tax (price instrument — fix the price, let quantities adjust) and a cap-and-trade system (quantity instrument — fix the cap, let prices clear). Both descend from Arthur Pigou’s 1920 framework for internalising externalities, refined by Ronald Coase’s 1960 bargaining theorem and operationalised by John Dales’ 1968 Pollution, Property, and Prices proposal for tradable emission permits and the US Acid Rain Program (Title IV of the 1990 Clean Air Act Amendments) which proved the construct at scale for sulfur dioxide. As of 2026, 75 carbon-pricing instruments are operational worldwide covering approximately 24% of global GHG emissions (World Bank State and Trends of Carbon Pricing 2024), with compliance markets generating ~700M-30B in retirement notional value. Carbon-market policy intersects with electricity-market design, industrial competitiveness (the CBAM debate), Article 6 of the Paris Agreement, corporate net-zero commitments under the Science Based Targets initiative (SBTi), and the rapidly evolving climate-disclosure regulatory regime (SEC, EU CSRD, ISSB).

Theoretical foundations — taxes versus quantities

Martin Weitzman’s 1974 Review of Economic Studies paper Prices vs. Quantities established the canonical framework: under certainty, a Pigouvian tax and a tradable-permit cap are equivalent (set the tax at the marginal abatement cost where MAC = SCC, or set the cap where the resulting permit price equals the same). Under uncertainty about the marginal abatement cost curve, the relative slopes of MAC and marginal damages determine optimality: if marginal damage is steep (a “cliff” — climate tipping points, ozone-depletion-style), a quantity instrument is superior; if marginal damage is flat over the relevant range (closer to climate change for any given decade), a price instrument is superior. Modern hybrid designs (Roberts-Spence 1976, Weitzman 1978 follow-up) combine the two: a permit market with a price floor (reserve price at auction) and price ceiling (cost-containment reserve, ETS Market Stability Reserve) trading off precise quantity control for price stability.

The Social Cost of Carbon (SCC) is the present value of marginal damages from one additional ton of CO2 emitted today, integrated over the damage trajectory. Nordhaus’ DICE model (William Nordhaus, Yale, 2018 Nobel) and the PAGE and FUND models (Hope, Tol) form the canonical “integrated assessment model” set behind SCC estimates. The US Interagency Working Group (IWG) SCC was set at approximately 190/tCO2 (2020 dollars, 2% near-term discount rate, central estimate)** — with the range from 340/tCO2 at 1.5% discount rate. The 2023 update incorporates: improved damage functions (Howard-Sterner 2017, Carleton-Hsiang 2022 mortality estimates from temperature exposure), declining-discount-rate frameworks (Ramsey-based prescriptive approach rather than market-based descriptive), and explicit treatment of socioeconomic-tipping-point and biophysical-tipping-point risks (West Antarctic Ice Sheet, Amazon dieback, AMOC slowdown). The 2nd Trump administration in early 2025 issued executive orders directing federal agencies to halt use of the IWG SCC; litigation is pending.

EU Emissions Trading System (EU ETS)

The EU ETS launched in January 2005 — the world’s first major cap-and-trade system. Phases:

  • Phase 1 (2005-2007): pilot, ~50% over-allocation, prices collapsed to €0
  • Phase 2 (2008-2012): aligned with Kyoto first commitment period, financial crisis cratered prices
  • Phase 3 (2013-2020): single EU-wide cap, auctioning the primary allocation method for power, free allocation under benchmarking for industry, aviation included
  • Phase 4 (2021-2030): cap declining via a Linear Reduction Factor (LRF) of 2.2% annually in 2021-2023, accelerated to 4.3% in 2024-2027 and 4.4% from 2028 under the Fit for 55 package
  • ETS2 (separate scheme, 2027 launch): buildings + road transport + small industry, with a Social Climate Fund (€86B 2026-2032) to offset distributional impact

Sectors covered: power generation, energy-intensive industry (steel, cement, lime, glass, ceramics, pulp & paper, refining, ammonia, basic chemicals, aluminium added Phase 4), intra-European aviation since 2012, maritime shipping added January 2024 (phased — 40% of CO2 in 2024, 70% in 2025, 100% by 2026 for vessels >5,000 GT entering EU ports). Approximately 10,000 installations plus ~1,500 aviation operators, covering ~40% of EU GHG emissions.

Market Stability Reserve (MSR): introduced January 2019, holds excess allowances when the cumulative number in circulation (TNAC, Total Number in Circulation) exceeds 833 million, releasing them when below 400 million. The 2023 reform tightened the MSR intake rate to 24% of TNAC and reduced the upper threshold to 833 million.

EUA prices (€/tCO2 spot, ICE Endex): Phase 3 averaged €5-25/t. Surged in 2021 from €25 to €90 by end-2021 driven by Fit for 55 anticipation. Peaked at ~€100/tCO2 (February 2023) before the gas-price collapse, hovered €60-90 range through 2024, dropped to ~€60 in early 2025 amid weaker industrial demand, mild winter, and exporter speculation about the Trump administration’s CBAM response.

Aviation CORSIA interaction: extra-European flights are covered by ICAO’s CORSIA (Carbon Offsetting and Reduction Scheme for International Aviation, voluntary phase 2021-2026, mandatory 2027), with EU ETS-CORSIA equivalence rules.

UK ETS, Swiss ETS, Norway ETS

The UK ETS launched January 2021 after Brexit, replacing UK participation in the EU ETS. Initially mirrored EU ETS design (cap, auction, free allocation, sectors). Allowances UKAs traded €10-20/t below EUAs typically. The Authority (DESNZ + devolved governments) confirmed a 30% tighter cap from 2024 vs the original UK cap trajectory and consulted on linkage with the EU ETS in 2023-2024 (politically charged; not yet executed as of mid-2026). UK CBAM legislation passed in 2024, effective January 2027.

The Swiss ETS has run since 2008 and was linked to the EU ETS from January 2020 — the first non-EU ETS linkage, with mutual recognition of allowances and joint cap operation. Norway participates in EU ETS via the EEA. Iceland and Liechtenstein similarly via EEA.

Regional Greenhouse Gas Initiative (RGGI)

RGGI is the first US cap-and-trade for power-sector CO2, launched January 2009 across nine Northeast/Mid-Atlantic states (Connecticut, Delaware, Maine, Maryland, Massachusetts, New Hampshire, New Jersey, New York, Rhode Island, Vermont) with Virginia joining 2021 (withdrew 2024 under Youngkin EO, litigation pending), Pennsylvania entering by Governor Wolf executive action 2022 (struck down by PA Commonwealth Court 2023, Shapiro administration appealing), and Washington State “linking” via its Climate Commitment Act (separately structured but reciprocal).

RGGI covers electric generating units ≥25 MW burning fossil fuels — power sector only, no industry, no transport. Auctions are held quarterly. The cap declined from 188M short tons in 2009 to ~71M short tons in 2024 under the 2017 Program Review that set a 30% reduction 2020-2030 trajectory. Clearing prices have ranged 13.83/short ton CO2 (March 2022 record), settling 15.92 in 2024); ECR withholds allowances if price falls below $7.22 in 2024.

RGGI cumulative auction revenue exceeds $7B since 2009, with proceeds returned to states for energy-efficiency, renewable-energy, bill-assistance, and direct-rebate programs (each state allocates differently). RGGI-region power-sector CO2 emissions fell ~57% since 2008 (vs national ~40% from coal-to-gas + renewables), though attribution to RGGI vs federal policy + gas displacement is debated.

California Cap-and-Trade and Western Climate Initiative (WCI)

California’s AB 32 (Global Warming Solutions Act, 2006) mandated 1990 emissions levels by 2020, achieved by 2016 (four years early). The Cap-and-Trade Program, administered by the California Air Resources Board (CARB), launched January 2013 and covers ~80% of California GHG emissions (power + industry + transportation fuels (since 2015) + natural gas (since 2015)). Linked to Québec cap-and-trade January 2014 via the Western Climate Initiative (WCI) governance umbrella. Ontario linked briefly (2017-2018) before Ford-government withdrawal.

Allowance prices (CCA, California Carbon Allowance, ICE Futures): traded mostly 32/tCO2 (May 2023)** before falling to ~60, tier 2 ~83 in 2024) constrain the range. The 2024 CARB rulemaking proposed cap reduction to align with SB 32 (40% below 1990 by 2030) and AB 1279 (carbon neutrality by 2045), tightening post-2026.

Offsets: California allows up to 4% of compliance obligation (2021-2025), declining to 6% (2026-2030) but with a half-from-DEBS sub-limit (Direct Environmental Benefit to the State) added 2017. CARB-approved compliance offset protocols include U.S. Forest, Urban Forest, Livestock Methane, Ozone Depleting Substances, Mine Methane Capture, and Rice Cultivation. Major offset issuers: Finite Carbon (BP-acquired), Anew Climate, Climate Action Reserve registry.

Washington State Cap-and-Invest launched January 2023 under the Climate Commitment Act (2021), modelled on California with auction-based allocation. Prices cleared $48-63/tCO2 in 2023 — surprisingly high — before falling after a November 2024 ballot initiative (I-2117) that failed, preserving the program. Washington has agreed in principle to link with California-Québec WCI; linkage rulemaking is in progress with target effective date 2025-2026.

New York Cap-and-Invest: proposed under Climate Leadership and Community Protection Act (2019); rulemaking stalled in 2024 amid Governor Hochul affordability concerns; not yet operational.

Oregon Climate Protection Program: emissions cap regulation struck down by court 2022, replaced with rulemaking 2023-2024.

China national ETS

The China National ETS launched July 2021, covering only the power sector initially (~2,200 thermal power plants, ~40% of China emissions, ~4.5 Gt CO2 coverage — by far the world’s largest by volume). Design is intensity-based rather than absolute cap: allowances are allocated free based on output × benchmark intensity (tCO2/MWh), so the “cap” floats with generation. Prices have traded ¥40-100/tCO2 (~14/tCO2 USD), cleared mostly in compliance-driven trading immediately before annual reconciliation deadlines.

Expansion: cement, steel, aluminium sectors added in 2024-2025 announcements (final inclusion 2025-2026); plans to expand to chemicals, paper, and aviation by 2027-2030. The intensity-based design weakens the absolute emissions cap that linkage with EU/CA ETS would require; analysts (ICAP, Trove Research, BNEF) project China will transition toward absolute caps by late 2020s but explicit timing remains political.

The earlier pilot ETSs in Beijing, Tianjin, Shanghai, Shenzhen, Guangdong, Hubei, Chongqing, Fujian (2013-2017 launches) continue to operate for sectors not yet covered by the national ETS.

South Korea, Japan, New Zealand, Australia

South Korea K-ETS (launched January 2015) is Asia’s first national absolute-cap ETS. Three phases (2015-2017, 2018-2020, 2021-2025), Phase 4 (2026-2030) being designed under K-ETS Master Plan. Covers 74% of national emissions across 600+ installations. KAU prices traded ₩10,000-40,000/tCO2 ($7-30 USD), with persistent over-allocation issues. Linked discussions with China and Japan ongoing.

Japan GX-ETS (Green Transformation): voluntary phase launched April 2023, mandatory phase 2026-2027 under the GX Promotion Act 2023 including a fossil-fuel surcharge (carbon tax variant) and the GX-ETS cap-and-trade. Prices in voluntary phase have cleared low (¥4,000-6,000/tCO2 ~$30/tCO2). Japan also has a small national Global Warming Countermeasure Tax (2012) at ¥289/tCO2 — among the lowest carbon prices.

New Zealand ETS (launched 2008) is unique for covering forestry as a participating sector (forestry obligations can be net negative). Prices have ranged NZ48-65/tCO2 in 2024-2025.

Australia: no national ETS (the Carbon Pricing Mechanism of 2012-2014 was repealed by Abbott government). The Safeguard Mechanism (since 2016, reformed 2023) caps emissions for ~215 large facilities >100 ktCO2e/year, with baselines declining ~4.9%/year. Facilities exceeding their baseline must surrender Safeguard Mechanism Credits (SMCs) or Australian Carbon Credit Units (ACCUs) — making it a hybrid baseline-and-credit system. ACCUs cleared A$30-35/tCO2 in 2024.

Carbon Border Adjustment Mechanism (CBAM)

The EU CBAM is the world’s first border carbon adjustment, designed to price the embedded carbon in imports to prevent carbon leakage (production relocation to lower-regulation jurisdictions). Legislative path: proposed July 2021 as part of Fit for 55, agreed December 2022, transition period October 2023 to December 2025 (importers must report embedded emissions but pay nothing), definitive period from January 2026 (importers must surrender CBAM certificates equivalent to EU ETS prices on embedded emissions).

Sectors covered (Phase 1): cement, iron and steel, aluminium, fertilisers, electricity, hydrogen. The European Commission’s 2025 review will consider expanding to organic chemicals, plastics, refineries, glass, and other ETS sectors by 2030.

Mechanism: an EU importer must (a) be authorised by national CBAM authority, (b) report quarterly during transition, then annually, the embedded direct emissions (scope 1) of imports plus, for some products, embedded indirect emissions from electricity, (c) purchase CBAM certificates from the central registry at weekly auction prices tracking EU ETS, (d) surrender certificates annually by May 31. The exporter’s home-country carbon-pricing payments can be deducted from the CBAM obligation, creating an incentive for exporters to argue for their domestic carbon prices.

WTO compatibility: the EU has positioned CBAM as non-discriminatory by applying the same effective carbon cost to domestic (via free-allocation phase-out under ETS) and imported producers. Free-allocation phase-out for CBAM sectors: ETS free allocation declines 2.5% (2026), 5% (2027), 10% (2028), 22.5% (2029), 48.5% (2030), 61% (2031), 73.5% (2032), 86% (2033), 100% (2034) — so CBAM’s full bite arrives only after substantial domestic decarbonisation.

Trading partner responses:

  • United Kingdom: announced UK CBAM December 2023, effective January 2027, covering aluminium, cement, fertilisers, hydrogen, iron and steel (notably excluding electricity and glass).
  • United States: PROVE IT Act (Coons-Cramer, bipartisan, 2023-2024) directs DOE to study embedded emissions of imports — a CBAM-precursor study. Various carbon-tariff bills introduced (FAIR Transition and Competition Act, Foreign Pollution Fee Act) without passage. Trump administration in 2025 issued executive orders directing USTR to evaluate retaliation against EU CBAM.
  • Canada: consultations on CBAM ongoing since 2021; no firm legislative path.
  • China, India, South Africa, Brazil: filed WTO concerns; bilateral lobbying for exemptions.
  • Australia: Productivity Commission 2024 review recommended against unilateral CBAM but watch EU developments.

Voluntary Carbon Market (VCM)

The Voluntary Carbon Market (VCM) transacts credits issued by independent standards, retired by buyers making voluntary claims (typically corporate net-zero or carbon-neutral commitments) rather than meeting compliance obligations. Market size: peak ~700M-$1B in 2023-2024 after integrity scandals, recovering modestly in 2025.

Standards and registries

  • Verra / Verified Carbon Standard (VCS): largest issuer by volume, ~70-75% of VCM market share by 2023. Founded 2005. Issued ~1.2 Gt CO2e cumulatively. Major project types: REDD+ (Reducing Emissions from Deforestation and Forest Degradation), ARR (Afforestation/Reforestation/Revegetation), IFM (Improved Forest Management), renewable energy (deprecated for many countries since 2020), and CCS/CDR.
  • Gold Standard: established 2003 by WWF with co-benefits requirement (community development, biodiversity). ~10% market share. Strong cookstove portfolio (TIST, EcoZoom, BioLite), wind/solar in developing countries.
  • American Carbon Registry (ACR): founded 1996, oldest US registry, now part of Winrock International. Major California compliance-protocol issuer for US Forest, Rice Cultivation, Detroit Salt Mine Methane Capture.
  • Climate Action Reserve (CAR): California-based registry founded 2008. Major US Forest, Livestock Methane, Mexico Forest, Urban Forest protocols.
  • Plan Vivo: community-based project standard, smaller scale, emphasis on equity and local benefits.
  • Puro.earth: engineered carbon removal registry, founded 2019, owned by Nasdaq since 2021. Issues CO2 Removal Certificates (CORCs) for biochar, BECCS, enhanced weathering, ocean alkalinity, direct air capture, mineralisation. Microsoft and Stripe are major buyers.
  • Isometric: 2022-founded engineered-removal registry (Stripe/Frontier-aligned); high-rigour MRV.
  • Climate Forward, BCarbon, Riverse, ClimeCo, GS4Global: smaller specialised registries.

Project types and pricing (2024-2025)

  • REDD+ avoided deforestation: $3-12/tCO2e. Heavy 2023-2024 reputational damage after Guardian-Die Zeit-SourceMaterial investigations and West et al. (2023) Science paper showing 90%+ of certain Verra REDD+ projects had non-additional baselines (overcrediting). Verra responded with the VCS Methodology VM0048 (consolidated jurisdictional-baseline approach 2023+) and offered project re-validation.
  • IFM (Improved Forest Management): $10-30/tCO2e. Scrutiny over Climate Action Reserve and ACR US Forest projects after California Forest Carbon Offsets investigation (2021) found ~30% overcrediting risk.
  • ARR (Afforestation/Reforestation): $15-40/tCO2e, durable plantations toward upper end.
  • Cookstoves: $4-12/tCO2e, also under scrutiny (Gill-Wiekierak 2024, Berkeley analysis suggesting ~80% overcrediting).
  • Methane destruction (livestock, landfill, mine, refrigerant): 100B+ flow); excluded from EU ETS and most modern systems after over-issuance scandals.
  • Direct Air Capture (DAC): 200-500 range. Climeworks Orca (4 ktCO2/yr), Mammoth (36 ktCO2/yr from 2024); 1PointFive (Occidental + Carbon Engineering) Stratos in Texas (target 500 ktCO2/yr 2025); Heirloom (mineralisation-based) Brisbane CA + Shreveport LA partnerships.
  • Biochar: $100-250/tCO2 (Puro.earth standard). Major issuers Pacific Biochar, Carbofex, Carbo Culture.
  • Enhanced rock weathering: $200-400/tCO2 — Lithos Carbon, UNDO, Eion; Stripe/Frontier offtakes.
  • Ocean alkalinity enhancement: $100-300/tCO2 — Planetary Technologies, Vesta, Ebb Carbon.
  • BECCS (Bio-Energy with Carbon Capture and Storage): $100-300/tCO2 — Microsoft contracted Stockholm Exergi 3.3 Mt over 10 years (May 2024 deal), Drax UK plans.
  • Mineralisation: $200-400/tCO2 — CarbFix (Iceland, Climeworks partner), Heirloom, Carbon Engineering.

Major buyers and the Frontier coalition

  • Microsoft: carbon-negative by 2030 commitment (announced 2020), targeting 5+ MtCO2 cumulative removal through 2030. Contracted suppliers include Stockholm Exergi (BECCS 3.3 Mt), Heirloom (mineralisation), CarbonCure (concrete), AspiraDAC (Australia DAC), Climeworks, 1PointFive, and many forestry projects. Microsoft’s 2024 sustainability report acknowledged scope-3 emissions rose 29% since 2020 due to data-centre construction and AI compute, complicating the net-zero trajectory.
  • Stripe / Frontier Climate: Frontier is a $1B advance market commitment (2022-2030) by Stripe, Alphabet, Meta, Shopify, McKinsey, with additional members (H&M, Workday, JPMorgan, Bain Capital, Watershed). Frontier purchases engineered CDR only — no nature-based — with rigorous MRV and durability requirements. Public offtakes include Heirloom, Lithos, Charm Industrial (bio-oil sequestration), Climeworks, 280 Earth, CarbonRun (river alkalinisation), Planetary Technologies.
  • Google: contracted Holocene, Lithos, ETH Zürich projects (2024-2025); part of Frontier.
  • Amazon Right Now Climate Fund: $100M+ for nature-based at scale; sustainability-linked supply chain.
  • JPMorgan Chase: $200M+ commitment 2023 across Climeworks, CO280, Charm.
  • Salesforce, ServiceNow, Shopify: corporate VCM purchasers with public portfolios.

Integrity initiatives

  • Integrity Council for the Voluntary Carbon Market (ICVCM): launched 2023, publishes Core Carbon Principles (CCPs) assessing methodologies. As of mid-2025, ICVCM had approved several methodology categories (e.g., ozone-depleting substances, landfill gas) and explicitly rejected several REDD+ methodologies (March 2024), forcing Verra to consolidate them.
  • Voluntary Carbon Markets Integrity (VCMI) Initiative: focuses on the buyer side — defines “Carbon Integrity Claims” (Silver/Gold/Platinum) for companies based on net-zero alignment and credit quality.
  • SBTi Beyond Value Chain Mitigation (BVCM): Science Based Targets initiative distinguishes operational decarbonisation (must reduce ~90% by 2050) from BVCM (additional offsetting). The April 2024 controversy — SBTi staff resistance to relaxed scope-3 rules — exposed internal disputes about offset reliance.

Rating agencies

  • BeZero Carbon (UK, founded 2020): rates 600+ projects on AAA-D scale; Series C $50M 2023.
  • Sylvera: AI-driven satellite-based monitoring, Series B 2022.
  • Calyx Global: founded 2022 by ex-Verra leadership.
  • Pachama: remote sensing + ML for forest verification; backed by Y Combinator, Future Ventures.

Article 6 of the Paris Agreement

Article 6 establishes the international rules for carbon-market cooperation under the Paris Agreement. Three operational mechanisms:

  • Article 6.2 — ITMOs (Internationally Transferred Mitigation Outcomes): bilateral cooperation between countries. The transferring country must apply a corresponding adjustment to its NDC accounting (so the credit isn’t double-counted). Switzerland was the first mover with Switzerland-Ghana (2020, cookstoves), Switzerland-Peru (2020, sustainable transport), Switzerland-Senegal (2022, efficient lighting), Switzerland-Thailand (2024, e-bus fleets). Sweden, Singapore, Japan (Joint Crediting Mechanism — JCM, 28+ partners), South Korea active.
  • Article 6.4 — PACM (Paris Agreement Crediting Mechanism): successor to the CDM (Clean Development Mechanism of the Kyoto Protocol). Rules finalised at COP29 Baku November 2024 after years of stalemate (Glasgow 2021 set framework, Sharm El-Sheikh 2022 + Dubai 2023 + Baku 2024 progressively refined). PACM credits will be issued by a UN Supervisory Body and used for NDC compliance with corresponding adjustments. The first credits expected to issue 2026.
  • Article 6.8 — Non-Market Approaches (NMA): cooperation without credit transfer (capacity-building, finance, technology).

The transition of CDM credits to PACM is a major issue: ~5 Gt of pre-2020 CERs (Certified Emission Reductions) hang in registry limbo. Baku COP29 set strict transition criteria limiting which legacy projects can re-register under PACM.

Methane regulation — fast-moving frontier

Methane is responsible for ~30% of post-industrial warming and has a 20-year GWP of 81 (IPCC AR6). Key 2023-2025 actions:

  • US IRA Methane Emissions Reduction Program (MERP) — Section 60113 of the IRA: imposes a Waste Emissions Charge of 1,200/t in 2025, $1,500/t in 2026 and after on methane emissions exceeding specified intensity thresholds from oil & gas facilities (segment-specific: 0.20% for production, 0.05% for transmission/storage). The fee is administered by EPA in coordination with the Subpart W greenhouse gas reporting program. Trump administration EPA rulemaking 2025-2026 is reviewing implementation.
  • EPA Methane Rule (OOOOb/c): finalised December 2023 — new source standards (OOOOb) and existing source emissions guidelines (OOOOc) for oil and gas, covering venting, flaring, well completions, fugitive leaks. Requires zero-emission pneumatic controllers, flare requirements, super-emitter response. State plans due 2026.
  • EU Methane Regulation 2024/1787: applies to oil, gas, and coal sectors plus imports (the latter notable — Europe’s first methane import standard). LDAR (leak detection and repair) every 12 months, venting/flaring restrictions, satellite-based measurement requirements. Importer obligations require demonstrating equivalent methane management in source jurisdictions from 2027.
  • Global Methane Pledge (announced COP26 Glasgow 2021): now ~155 countries committed to 30% methane reduction by 2030 (vs 2020). No enforcement mechanism but driving national policies.
  • Detection technology: MethaneSAT (Environmental Defense Fund, launched March 2024 on SpaceX Transporter-10) provides high-resolution methane mapping, with anomalies routinely published; GHGSat (Canadian commercial, 12+ satellites operational); Carbon Mapper (NASA-JPL + Planet); Kayrros (French analytics).

Climate disclosure regulation

  • SEC Climate Disclosure Rule (final March 2024): requires public companies to disclose scope 1 + scope 2 emissions (if material), climate-related risks, governance, financial impacts. Scope 3 was removed from the final rule after political opposition. The rule was stayed by the SEC in April 2024 pending Eighth Circuit consolidated litigation; the second Trump SEC (2025) abandoned defense of the rule and proposed rescission.
  • California SB 253 (Climate Corporate Data Accountability Act, 2023): companies doing business in California with revenue >500M revenue companies to publish biennial climate risk reports. AB 1305 (2023): requires marketers of carbon offsets in California (or making “carbon neutral” claims) to disclose project details and integrity assessments. CARB rulemaking ongoing 2025-2026.
  • EU Corporate Sustainability Reporting Directive (CSRD): phased application from 2025 (FY2024 reporting) for large companies, 2026+ for SMEs and non-EU companies with EU subsidiaries. Reports follow European Sustainability Reporting Standards (ESRS) issued by EFRAG, including ESRS E1 (Climate Change) covering scope 1/2/3 and transition plans. Coverage: ~50,000 companies versus ~11,700 under predecessor NFRD. The 2025 Omnibus Simplification Package delayed reporting for some categories and reduced scope, in response to competitiveness concerns.
  • IFRS S1 + S2: ISSB (International Sustainability Standards Board) issued June 2023; S1 general sustainability-related financial information, S2 specifically climate. TCFD (Task Force on Climate-related Financial Disclosures) was officially consolidated into ISSB in 2024 with TCFD’s monitoring role transferred. Jurisdictions adopting ISSB: UK (UK SDS, 2025+), Australia (AASB S1+S2, 2025), Brazil, Canada (CSSB consultation), Japan (SSBJ standards 2025), Singapore, Hong Kong, Malaysia, Nigeria, South Africa.
  • EU CSDDD (Corporate Sustainability Due Diligence Directive): human rights + environmental due diligence in supply chains, agreed May 2024 with phased implementation 2027+. The 2025 Omnibus reform softened thresholds.

Internal carbon pricing

Many corporations apply an internal carbon price (a shadow price used in capital allocation, project evaluation, or as an internal fee). CDP (Carbon Disclosure Project) tracks ~2,000 companies using internal carbon prices. Common forms:

  • Shadow price: a hypothetical 30-150/tCO2, with utilities and oil majors often at $40-80, tech companies higher).
  • Internal fee: actually charged to business units, recycled into a green fund. Microsoft’s internal fee (~100/tCO2 for scope 1+2 in 2020 and $5/tCO2 for scope 3 to fund its carbon-removal commitments).
  • Implicit price / proxy: emerged from sustainability-linked financing, KPIs, executive compensation.

Carbon tax jurisdictions

  • Sweden (1991): ~$135/tCO2 in 2024, the world’s highest. Industry (ETS-covered) is exempt; non-ETS fuels covered.
  • Switzerland: CHF 120/tCO2 (~$135) on heating fuels; 2/3 returned to citizens, 1/3 to building decarbonisation fund.
  • Norway, Finland, Denmark, Iceland: all $50-150/tCO2 range.
  • France: TICPE carbon component, frozen at €44.6/tCO2 in 2018 after Yellow Vest protests; covers fuels not in ETS.
  • UK Carbon Price Support: floor under EU ETS pre-Brexit, now under UK ETS; £18/tCO2 (~$23) for power sector.
  • Canada: federal Greenhouse Gas Pollution Pricing Act (2018) carbon backstop, CAD 15/yr to CAD $170/t by 2030; provincial systems (BC pioneer 2008, Quebec WCI member, Ontario federal backstop after withdrawal, Alberta TIER for large emitters). Federal Climate Action Incentive Payment returns ~90% of fuel-charge revenues to households quarterly. The April 2025 federal election produced policy uncertainty about carbon-tax continuation.
  • Japan: Global Warming Countermeasure Tax at ¥289/tCO2 — among the lowest globally.
  • Argentina, Chile, Colombia, Mexico, Singapore, South Africa: carbon taxes in $1-25/tCO2 range, often limited scope.
  • Energy Innovation and Carbon Dividend Act (US, Citizens’ Climate Lobby-promoted): a price-and-dividend bill never advanced in Congress; periodically reintroduced.

Trading venues, brokers, and infrastructure

  • ICE Futures Europe: EUA futures (the largest carbon contract by volume), UKA futures, CCA (California) futures, RGGI futures, NZU futures.
  • CME Group: CCA, RGGI, voluntary carbon (CBL Standardized GEO, N-GEO contracts).
  • EEX (European Energy Exchange): EUA primary auctions for the EU; spot and futures.
  • Xpansiv CBL: largest voluntary-carbon spot trading venue; GEO (Global Emissions Offset), N-GEO (Nature-Based), C-GEO (Core), SD-GEO (Sustainable Development) standardised contracts.
  • ACX (AirCarbon Exchange): Singapore-based, regulated by ADGM (Abu Dhabi Global Market).
  • ClimateImpactX (CIX): Singapore exchange (SGX/Temasek backed).
  • Brokers and trade desks: Vertree (BP, formerly), Trafigura Carbon, EcoAct (Atos), Anew Climate, ClimeCo, South Pole (Switzerland — under 2023 reputational stress after Kariba REDD+ investigations), ClearBlue Markets (Canada/US), Numerco (UK).

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