Despite ructions in global markets at the start of 2025, winners of this year’s Environmental Market Rankings remain cautiously optimistic about compliance carbon markets. Rob Langston reports
The volatile geopolitical and market backdrop over the past 12 months has led to a turbulent year for buyers in compliance carbon markets. However, winners of this year’s Environmental Market Rankings said that, in the face of more policy uncertainty, there were signs that the compliance markets were maturing.
“The main theme for 2025 – and this is definitely continuing into 2026 – is that elections matter and carbon markets are being evaluated through the lens of affordability,” says Jennifer McIsaac, chief market intelligence officer at ClearBlue Markets, which topped several categories across North America and Asia. “The political backdrop is extremely important, at the national level and then at the individual programme or jurisdiction level.”
For some winners, the lack of clarity over policy and unwinding of speculative activity prompted a return of fundamentals-based pricing and a more conducive environment for compliance buyers.
“The compliance markets have moved between regimes like a restless sleeper, pivoting from fuel-switch dynamics, to macroeconomic risk and political theatre and back again,” says Riham Wahba, senior market analyst at Vertis Environmental Finance, winner of five categories.
“Client behaviour has been all over the map, but one pattern holds. In an environment this muddy, where policy and geopolitics dominate, they’re not building hedging strategies. They’re surviving day-to-day.”
Europe and UK: Presenting a unified front
Tim Atkinson, head of carbon at CFP Energy, which was named best trading company for OTC and spot in the UK, says an “almost one-way bet” in the European market had built towards the end of the year as traders and speculators became convinced by expectations of policy changes, including less free allocations and tighter caps.
“They were firmly of the view that carbon prices should certainly be a lot higher than they were at the time,” he explains. “A lot of speculators returned from the Summer break and thought that carbon prices were undervalued and should be somewhere closer to €100 ($118). This created a cascade of bullish bets as more and more traders built speculative long positions which in turn forced the EUA [EU allowance] price higher … pushing the benchmark December 2026 EUA price over €92 in January.”
“There has [since] been a bit of a correction of speculator interest,” he says. “We’re back down to levels that feel a bit more fairly priced and a bit more realistic for where the market is. Unsurprisingly, that’s bringing compliance buyers back to the table.”
As this article went to press, EUA prices were trading at about €70.
One of the themes that Atkinson says could emerge in the year ahead is the kind of policy uncertainty that caused speculators to go so “gung-ho” last year, highlighting some “political nervousness” among some EU members over long-term targets.
One of the most significant recent developments for the European carbon markets was the introduction of the Carbon Border Adjustment Mechanism (CBAM), which entered into its definitive phase at the start of the year. While the bloc’s ETS has been in place for two decades, CBAM is aimed at tackling ‘carbon leakage’ and allows the EU to extend a carbon price to goods produced beyond its borders. It has caught the attention of other jurisdictions, with the UK also preparing for the launch of its own CBAM in 2027.
“We’re in a world where there’s a lot of uncertainty in global trade, we’re not quite in a world where we can just import whatever we want,” says Atkinson. “We still want to reduce carbon emissions, but not at any cost. And we also see the value of having things ‘made in the UK’ or ‘made in the EU’.
“So, yes, we want an ambitious ETS, but not at the expense of pushing industry out of Europe.”
The planned introduction of a CBAM in the UK is just one way that the two jurisdictions have been moving closer together on climate issues following Brexit. Last year, after much speculation, the UK and EU announced they would investigate the linking of the two cap-and-trade systems in May, with negotiations beginning at the start of 2026.
The linking of the two systems would have a considerable impact on the UK ETS market, which Vertis Environmental Finance’s Wahba says offered “a masterclass in price discovery under duress, with the curve embedding the linkage optionality”.
“In an environment this muddy, where policy and geopolitics dominate, clients are not building hedging strategies. They are surviving day-to-day” – Riham Wahba, Vertis Environmental Finance
“The UK ETS [is] a one-story market right now, and that story is linking,” says Wahba. “Nothing else matters until we see how that plays out.
“This is not just about liquidity, though linkage of the two would really help. We see it as a geopolitical statement that speaks louder than any communique, with the US backpedalling on climate ambitions, Europe needs to present a unified front.”
Atkinson adds: “The UK carbon market continues to be driven by the bigger EU market for now but, as we have seen recently, the political progress on linking the two schemes will also influence the price spread.”
He said the UKA-EUA discount had narrowed to £8 ($10.9) per tonne of carbon dioxide emitted in early January before widening to more than £20 during volatility in February as markets reacted to falling confidence in the UK government as prime minister Keir Starmer faced several challenges.
North America: The best of times and the worst of times
The opening line of Charles Dickens’ novel A Tale of Two Cities – “It was the best of times, it was the worst of times” – provides Evolution Markets managing director and head of brokerage operations Peter Zaborowsky with the most appropriate comparison between the US and UK compliance markets in 2025.
“We’re seeing new funds from the US as well as Europe entering the carbon market, and for many, there seems to be more initial comfort with the EU market because of its more stable regulatory environment,” says Zaborowsky, whose Evolution Markets won best broker for options and futures in EU markets and California, as well as best broker OTC/spot for the UK.
“Contrasting the European and UK markets with the US market in 2025 is a little bit like ‘A Tale of Two Cities’ because the US was contending with significant regulatory uncertainty, which was a bigger driver of market activity.”
He adds: “In April, the Trump Administration issued an executive order [the April 2025 Executive Order on State Overreach] directing the Attorney General to review the legality of state climate-driven programmes, specifically mentioning California and New York. This action shocked both the California Carbon Allowance (CCA) and Regional Greenhouse Gas Initiative (RGGI) markets, initiating a sell-off.”
The move is thought to have contributed to the Western Climate Initiative (WCI) auction being undersubscribed for the first time since the Covid-19 pandemic, alongside programme reviews by California and Quebec.
“We’re seeing new funds from the US as well as Europe entering the carbon market and for many, there seems to be more initial comfort with the EU market because of its more stable regulatory environment” – Peter Zaborowsky, Evolution Markets
For California, pricing of California Carbon Allowances began 2025 at around $35 per metric tonne of carbon but had fallen closer to $30 by year-end, says ClearBlue’s McIsaac, as regulatory and political uncertainty took a toll.
The market was buoyed when the California Air Resources Board (CARB) confirmed the extension of the cap-and-invest system until 2045, although its proposals to reduce available allowances by the lowest statutory amount highlighted its focus on consumer affordability.
“When the initial statement of reasons (ISOR) came out in January, reducing the available supply and strengthening the programme, CARB had been weighing three options of reducing available allowance supply by 2030 of 40%, 48% or 56%,” says Zaborowsky.
“While it was felt that the most dramatic cut was not going to take place, it was the smallest cut of 40% that appeared in the ISOR. Since its release, CCA pricing has sagged some, and the market is trying to find a new direction.”
ClearBlue’s McIsaac says the regulatory package “has not moved the needle a lot” on prices, which remain close to the 2025 floor price of $25.87, adding that an ‘allowance shave’ as part of the legislative process would be “constructive” for prices.
Quebec, meanwhile, recently announced plans to delay its 2030 GHG emissions reductions target to 2035, which McIsaac described as “another move toward reconciling ambition versus reality and affordability for consumers too”.
She explains: “Quebec has elections towards the end of 2026, too. So, it’s a combination of watching out for the regulatory process playing out, but then also the interaction of elections coming up. In terms of the Cap-and-Trade, Quebec is still expected to put out a draft regulatory package in winter 2026.”
“CBAM is hanging over the entire APAC region, including China, which is obviously extremely important for trade with the EU” – Jennifer McIsaac, ClearBlue Markets
McIsaac says any moves to tighten up balances in the WCI programmes would help to lift prices, but policy certainty is key.
For Washington state, which is “hyper-focused” on linkage with the WCI, prices remain “really high right now”, according to McIsaac. Last year, the Washington legislature passed a bill to shore up cost containment, lower the ceiling price and put more allowances into circulation, moves which could potentially bring prices down later in the year.
“They are well into the $70s right now, and they are having cost containment auctions too, so that could potentially bring prices down in Washington over 2026,” she says.
On the East Coast, RGGI prices have been “pretty robust”, says McIsaac, after its programme review last year.
“The RGGI programme review, which all of the states will adopt for implementation in 2027, shored up cost containment on the high end of their programmes, adding the potential for even more allowances,” she says. “They realise that, with demand from AI [artificial intelligence] and offshore wind being challenged, it’s going to be really hard to comply with the RGGI trajectory that’s envisioned in state climate goals.”
Another potential issue for the cap-and-trade programme is the return of Virginia to the initiative following the election of Democrat governor Abigail Spanberger, who made rejoining a priority after the state withdrew in 2023.
However, the entry of such a large state into the programme poses some questions about allowances and pricing, particularly as other member states implement the results of the programme review.
“The market is looking toward the next auction in March, with the cost containment reserve a little above $18,” says Evolution Markets’ Zaborowsky. “The market has experienced some volatility due to extreme weather events, proposed potential regulatory changes outlined in the program review last July, and the potential for new states entering the market, such as Virginia in 2026.”
He adds: “Although some carbon markets, specifically RGGI and CCA, were challenging in 2025, we hope that … traders, compliance entities, and investors will return to the market recognising their long-term potential.”
Marijn van Diessen, CEO of STX Group, winner of four awards, including Best Trading Company in North American markets (RGGI), says many of the state compliance carbon schemes in the US are “still continuing as per usual, although there is a lot of debate around affordability”.
“Some of these states’ legislators understand the fact that these schemes will add to the cost of energy,” he says. “Some states are discussing whether they should have a scheme or not, and some are debating the cost of it. So, the mid-term elections will probably be very interesting to see what direction they are heading and what the future of emissions trading schemes might be.”
Asia-Pacific: CBAM has landed
The introduction of the EU’s CBAM had the biggest impact on carbon markets in the APAC region, with several countries making changes to their own ETS or considering launching their own.
For instance, China significantly expanded its ETS beyond the energy sector to include several high-emitting sectors covered by CBAM, including cement, steel and aluminium. Meanwhile, Vietnam officially launched its own pilot ETS targeting high-emitting sectors, including energy, iron, steel and cement. India is also exploring the launch of an ETS.
“The EU’s CBAM has been really important for the APAC region, and for the globe, because imports into the EU carry the CBAM price, which is based on the EU price,” explains ClearBlue’s McIsaac. “If you can align your domestic carbon programme with CBAM, there’s more of a possibility to buy your way out of the obligation.”
She adds: “CBAM is hanging over the entire APAC region, including China, which is obviously extremely important for trade with the EU.
“We did see China pricing softening and soft for a lot of 2025, but then we saw a firming in the Fall of 2025, and that was tied to moves to strengthen the programme and to better position it for interaction with CBAM.
“We saw tighter allocation rules and changes to the allowance banking quotas. We’re also seeing a shift in the China ETS, from an intensity-based cap to an absolute cap, and that is to align it with the EU ETS.”
Over the course of the year, Chinese prices started to rise from around CNY50 ($7.23) to CNY80 more recently, she says.
In Australia, pricing in the Australian Carbon Credit Unit (ACCU) scheme, a baseline-and-credit system, saw little change in policy following the federal elections that saw the incumbent Labor Party returned to government.
“ACCUs also benefited from an election in 2025, and there’s support for the programme and the caps,” says ClearBlue’s McIsaac. “The pricing has been mostly flat, though, but that programme is on firm ground.”
The Safeguard Mechanism, which assigns the baseline for the country’s largest emitters, is set for review later in 2026, which will cover emissions reduction targets and could see the introduction of a price corridor as seen in other schemes to tackle low prices, some commentators have observed.
In New Zealand, CORE Markets – named as best broker in the APAC region – noted that confidence in the New Zealand ETS had deteriorated towards the end of the year, with prices weighed down by “persistent policy uncertainty despite tightening auction supply” and trading “near levels last seen in 2021”. It highlighted policy developments such as delinking from Paris Agreement targets, which could lead to higher volumes of allowances, and rejecting the recommendations of New Zealand’s Climate Change Commission to strengthen emissions targets.
And later this year, Japan’s GX ETS is set to transition from a voluntary baseline-and-credit system to a mandatory cap-and-trade programme, covering approximately 60% of national emissions, as part of its 10-year ‘green transformation’ (GX) decarbonisation plan.