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The U.S., the Paris Agreement and carbon markets

Hæge Fjellheim
Hæge Fjellheim
Director of Carbon Research at Refinitiv

What will be the impact on the carbon markets of the U.S. rejoining the Paris Agreement under the presidency of Joe Biden?


  1. The U.S. rejoining the Paris Agreement will have little immediate impact on carbon markets.
  2. Existing carbon markets are regional rather than global and it is the regional policies governing the EU ETS, China’s ETS and the two North American carbon markets (the WCI and RGGI) that influence these carbon markets.
  3. Overall and in the longer run, the Biden presidency should prove to be net positive for carbon markets, with changes ahead in both the geo-political and corporate arenas.

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The U.S. has officially rejoined the Paris Agreement, with other countries’ leaders relieved that the world’s second-biggest emitter has returned to the fold.

When it comes to making global climate change policies, having the richest country onboard is critical – it certainly helps the Paris Agreement’s sense of togetherness, and might even encourage other countries to take on more ambitious emission reduction targets.

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How will the U.S. rejoining the Paris Agreement

impact carbon markets?

Because carbon markets are tools to reach climate change and emission reduction targets, one might assume that the U.S. rejoining the Paris Agreement would have a huge impact on emission trading systems, with the carbon markets volatile on the back of this news.

However, this is incorrect: carbon trading is relatively immune to the whims of countries’ participation in agreements, as existing carbon markets are local rather than global.

Though these markets are collectively worth over €200bn and growing (see our Carbon Market Year in Review Report for 2020), it’s the regional policies that matter: it was the decisions of the European Union that created the EU ETS, China’s new national ETS is the result of its domestic policy, and the two North American carbon markets (the WCI and RGGI) resulted from policies of U.S. states and a Canadian province.

Ironically, we pointed this out back in 2016 when former President Trump was elected, which caused concern that his policies would create volatility in the WCI and RGGI markets. Despite his tenure being “bad” for the environment overall, it had little effect either way on prices, volumes, or other market behaviour in either of those two emission trading regimes.

They are run by and for the participating jurisdictions, not subject to the whims of the respective U.S. national administration. Both increased in value during 2020, as expectations of tighter caps in the near future made for an overall rise in the average allowance price – even during the pandemic.

Will there be a national U.S. carbon market?

The other expectation that needs to be considered is that the U.S. will soon create a national carbon market now that its president is in favour of climate change mitigation and the Congress is majority Democrat.

Because a U.S. carbon market came close to becoming law under those conditions during former President Obama’s first term, observers draw the conclusion that conditions are ripe for it now. In 2010, a bill to establish an American cap-and-trade system similar to the EU ETS (the Waxman-Markey bill) passed the House of Representatives but failed in the U.S. senate – it is the closest such a proposal has come to being entrenched into law.

However, the constellation of the U.S. legislature is very different a decade on.

Democrats hold a slimmer majority than in 2010, and that majority is in turn more divided into factions Biden is trying to unite. The younger/newer faction is aligned with the environmental justice movement, parts of which vehemently oppose market-based emission reduction measures they see as granting companies the ability to “buy their way out of” pollution controls.

Even Senator Ed Markey, who co-authored the ETS legislation over a decade ago, has suggested the Biden administration should pursue a national renewable energy standard rather than a carbon market.

In the COVID-19 pandemic, policies like carbon trading schemes that appear to favour a “Wall Street crowd” (because they involve derivatives trading, brokers, banks and corporate entities) are viewed negatively when compared with energy efficiency or renewable power mandates that are tied to poverty alleviation and job creation.

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Biden’s presidency positive for carbon markets

To be clear, the net effect of the Biden presidency and of the U.S. being a party to the Paris Agreement is still positive for carbon markets: for one, it improves relations over this issue with countries that do have carbon markets.

Biden’s first call to Chinese president Xi Jinping involved discussion of climate change, just as China is launching trading in its new national ETS. Biden ran on a platform of incorporating climate change mitigation into U.S. trade policy. This has involved discussion of carbon border adjustments, which the EU is also looking into, in parallel with, and in the context of, EU ETS revision.

On the corporate side, companies are changing their stance accordingly: the U.S. Chamber of Commerce (the country’s biggest business lobby) opposed carbon pricing under Trump, but since January its website says the group “supports a market-based approach to accelerate GHG emissions reductions across the US economy.”

Some energy firms like Shell publicly endorsed Biden’s act of rejoining the Paris Agreement, citing the pact as fostering their purported long-term moves away from fossil fuels towards renewable energy.

So our message is not to expect some kind of carbon trading bonanza just because the U.S. is again part of the global climate agreement, but the trend is definitely net positive when it comes to the overall conditions under which emission trading systems operate.

With disastrous weather events making climate change ever more real, and governments – now including the U.S. – correspondingly making emission reductions a priority, we’re bound to see more action in global carbon markets than less over the coming years.

Refinitiv Carbon Research will continue to monitor and analyse all developments in the space.

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