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Global carbon markets hit new highs

Hæge Fjellheim
Hæge Fjellheim
Director of Carbon Research at Refinitiv

After global carbon markets rose to a new record in 2020, Hæge Fjellheim, Head of Carbon Research, analyses the factors behind the increases and identifies initiatives and events that will help to determine future trends.


  1. In 2020, global carbon markets soared to a new record, with a collective value of carbon emissions permits totaling more than €229bn. This was the fourth straight year that a new record was set.
  2. Refinitiv’s Carbon Market Year in Review 2020: Blooming carbon market on raised climate ambition analyses the story in the main markets, including Europe, North America and China.
  3. Major carbon markets saw a prices and volumes rise on expected tightening of emission caps due to more ambitious climate goals in the future. Under the Paris Agreement, 2020 had been called the “year of ambition”, and in the last months of the year a number of major carbon emitters made announcements committing to mid-century carbon neutrality.

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Carbon markets worldwide hit yet another record in 2020: The collective value of all trades of carbon emissions permits around the world topped €229bn, based on our data about the volume transacted and the average price in the different regional markets.

What’s more, this year isn’t even an outlier: It’s the fourth consecutive year that global carbon trading has hit a new record — this year’s total market value is more than five times the value in 2017.

What is causing carbon markets to rise?

It seems strange that markets for emission permits would be growing in a year where a global pandemic actually made for far lower emissions due to depressed economic activity. However, we need to remember that total market value is volume times price — either more emissions permits changed hands over the year, or the ones that transacted did so at higher prices, or both.

That’s exactly what happened in most of the world’s carbon markets in 2020 — last year saw an increase in both prices and transactions.

Access the report — Carbon Market Year in Review 2020: Blooming carbon market on raised climate ambition

Our annual year-in-review report takes a look at how these volumes and prices played out, starting with the market that accounts for most of the carbon trading globally: The European Union Emission Trading System (EU ETS).

EU sets ambitious climate change mitigation targets

In Europe, expectations that the carbon market’s supply/demand balance would be shrinking dramatically in the coming years made for a steep price rise, despite the fact that estimate that actual emissions in the power and industry sectors were down 14 percent in 2020.

European carbon prices fell rapidly in March when the COVID-19 pandemic hit the region, but later recovered to record highs above €33/t by the end of the year. Prices have continued to reach unprecedented levels in 2021 exceeding €37.5/t as of 3 February 2021.

Market players are willing to pay more for EU allowances because they foresee them being ever more scarce going forward.

Figure 1: World carbon markets 2012-2020; total value by segment, total volume

World carbon markets 2012-2020; total value by segment, total volume

Why this expectation of scarcity? EU decision-makers got increasingly serious over the course of 2020 about making the bloc’s climate change mitigation more ambitious.

On 11 December, exactly one year after the European Commission proposed to strengthen the bloc’s climate ambition as part of its Green Deal, European leaders solidified a target to bring emissions down by at least 55 percent compared with 1990 levels — a step-change from currently 40 percent reduction target.

Since Europe will not meet the more ambitious 2030 goal without making its flagship climate instrument — the EU ETS — more stringent, carbon market players are betting on scarcity.

The fact that a much more ambitious climate target for 2030 was agreed in just a year — and a year featuring a global pandemic at that — ensures the key carbon market fundamental of overall policy stringency.

Moves in North American carbon markets

The other carbon markets followed similar patterns.

North America’s two regional emission trading systems — the Western Climate Initiative covering emissions from power plants, industry and transport in California and Quebec, and the Regional Greenhouse Gas Initiative covering power plant emissions in 11 north-east and mid-Atlantic states — saw prices drop in spring and volumes rise with sell-offs on the back of fears that COVID-19 would cause a global recession.

Prices crept up over the rest of the year, however, as both programs are expected to get tighter in the coming years — they are under review by regulators seeking to make them more effective at incentivising emissions cuts.

Although Joe Biden’s victory in the presidential race brings real progress for climate change mitigation — the U.S. is “back in the game” on the global effort to cut greenhouse gases — it doesn’t particularly affect existing regional carbon markets and a national ETS is not on the cards for the U.S.

Figure 2: Annual average carbon price in the world’s major carbon markets

Annual average carbon price in the world’s major carbon markets

What’s happening in China?

Perhaps the biggest carbon market event in 2020 happened in November, when the Chinese government published long-awaited draft market rules and allocation plan for China’s national ETS.

This came after the pandemic had slowed progress towards the program, and many assumed there would be yet more delays.

In September, Chinese President Xi Jinping unexpectedly pledged his country would be carbon neutral by 2060, and also upped the interim climate targets of the world’s biggest greenhouse gas emitter.

That gave momentum to the preparations for a national carbon market, such that now all the groundwork is in place for what will become the world’s biggest emission trading system to finally see transactions.

On 1 February 2021, China national carbon market rules entered into force, marking the start of the biggest carbon market.

We expect trading to start in the second quarter of 2021 at the latest.

“The year of ambition”

Declaring a mid-century net-zero emissions target was somewhat of a trend for governments worldwide in 2020; “the year of ambition” under the Paris Agreement.

The last three months of 2020 saw China, Japan, South Korea, Canada, South Africa, and many smaller emitters commit publicly to some form of carbon neutrality goal around the timeframe of 2050, while the European Union is about to enshrine its target of net-zero emissions by that year into law.

Several countries also announced updated mid-term targets, and more updates to 2030 national contributions are expected by the global climate summit COP26 in November this year.

Since emission trading systems are tools to help achieve more ambitious climate targets, we expect the trend of increased global carbon trading activity, and value, to continue.

Access the report — Carbon Market Year in Review 2020: Blooming carbon market on raised climate ambition


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Faqs

What caused carbon markets to rise?

It seems strange that markets for emission permits would be growing in a year where a global pandemic actually made for far lower emissions due to depressed economic activity. However, we need to remember that total market value is volume times price — either more emissions permits changed hands over the year, or the ones that transacted did so at higher prices, or both. That’s exactly what happened in most of the world’s carbon markets in 2020 — last year saw an increase in both prices and transactions. For further details, download the report — Carbon Market Year in Review 2020: Blooming carbon market on raised climate ambition