The Paris Agreement and the widely adopted goal to meet net-zero greenhouse gas emissions have fostered global consensus on tackling climate change, with carbon pricing playing a crucial role. As a market-driven carbon pricing method, global carbon markets (GCMs) are an effective tool to determine carbon pricing and support the net-zero goal.

This CFA Institute Research and Policy Center report, “An Effective Tool for Net Zero: A Foundational Overview of Global Carbon Markets,” provides a comprehensive overview of GCMs and their vital role in supporting the global goal of achieving net-zero greenhouse gas emissions. GCMs are still evolving; although they all utilize cap-and-trade mechanisms at their core, they are geographically fragmented and vary in scope and design.

GCMs include both compliance carbon markets (CCMs) and voluntary carbon markets (VCMs). They are market-driven mechanisms designed to set a price on carbon emissions. This pricing is crucial for incentivizing reductions in greenhouse gas emissions and for fostering the wider growth of green technologies and finance. Our report emphasizes the necessity for investors to understand GCMs, not only because of the extent to which carbon pricing influences corporate activity, profitability and transition planning, but also because of the financial opportunities carbon allowances and credits present as these markets expand.

The report comprises five main chapters, each focusing on a different aspect of GCMs:

1. Introduction: The first chapter introduces the background of the Paris Agreement and the global push toward net-zero emissions. It highlights how these objectives are becoming increasingly relevant to the investment industry.
2. Mechanisms of GCMs: The second chapter delves into the detailed workings of CCMs. It explains how these markets operate, focusing on mechanisms like carbon allowances and offsets, the cap-and-trade system, and coverage, using three well-known CCMs as examples. It also introduces the mechanisms of VCMs.
3. Advantages of GCMs: The third chapter highlights the benefits of global carbon markets as effective tools for achieving net zero goals. GCMs contribute to the gradual reduction of carbon emissions by setting a price on carbon, which creates a financial incentive for emitters to reduce their emissions.
4. Challenges of GCMs: The fourth chapter addresses the various challenges that GCMs currently face. These issues include unreasonable caps on emissions, price fluctuations, disparities in the development of different markets, severe market fragmentation, high uncertainty, and limited access for direct investor participation.
5. Comparison with Carbon Taxes: Finally, we compare GCMs with carbon taxes, another method of carbon pricing influenced by fiscal policy. While both approaches aim to reduce carbon emissions, they do so in different ways.

In addition to offering a detailed overview of GCMs, our report identifies areas for future research. These include examining the market structure of GCMs, exploring efficient auction mechanisms for carbon allowances, and conducting empirical studies on the effectiveness of cap-and-trade systems in reducing emissions. Such research could further enhance the understanding and development of GCMs, contributing to more effective global climate policies.