Global Compliance Carbon Markets: Structure Explained

With the rapid development of global compliance carbon markets (CCMs) in recent years, their connection with the investment industry has grown increasingly significant. As the markets evolve, CCMs can offer sustainability-focused investors an effective tool to support their net-zero goals. Furthermore, as an emerging asset class, carbon is becoming a more prominent consideration in the development of investment and trading strategies. Moreover, as CCMs expand coverage to a larger number of companies, firms that previously emitted carbon at no cost now face associated expenses. This shift increases these firms’ operating costs, which directly affects investor returns. The expanding scope of carbon markets will affect an increasing number of companies and investors.

“Global Compliance Carbon Markets: Structure Explained” analyzes the market structure of CCMs in depth. The report offers practical guidance for investment firms and investors that want to engage directly with CCMs and incorporate carbon into their investment strategies — whether to enhance portfolio performance, hedge climate-related risks, or tap into a growing alternative asset class. It also outlines strategies to boost market efficiency and investor access.

The report is structured into four focused sections:

• The first section profiles the major players in global CCMs and unpacks their distinct roles.
• The next section dives into secondary market instruments. Spot trades help regulated companies meet immediate compliance needs, while derivatives support long-term carbon budgeting and cost control — shielding firms from volatile allowance prices. The rise of financial products like the KraneShares Global Carbon Suite and iShares MSCI ACWI Low Carbon Target ETF (CRBN) signals the growing financialization of carbon.
• The subsequent section analyzes market liquidity. It breaks down key metrics — price volatility, bid-ask spreads, total market volume, open interest, and order book trade volume — to assess the depth of both spot and derivative markets.
• The final main section explores transparency challenges in CCMs, spotlighting issues that hinder market efficiency.

• Participants: Global CCMs have various participants. Regulators establish the framework for CCMs and ensure their implementation. Covered entities actively participate in CCMs to meet compliance requirements. Exchanges and central counterparties provide the infrastructure for carbon allowance trading. Institutional investors (investment firms and banks) actively participate in carbon trading and act as financial intermediaries. Although retail investors have limited direct participation options in CCMs, they can still participate indirectly through carbon ETFs and the voluntary carbon market.
• Instruments: The secondary market for carbon allowances offers covered entities a range of instruments for carbon budgeting and hedging over various time horizons. EU allowances dominate the spot market, and the China Emission Allowance spot market is rapidly developing. The derivative market offers a wider variety of products. Multiple exchanges provide futures and options linked to CCMs in Europe and North America. In addition, ETFs provide a channel for retail investors to gain exposure to carbon allowances. The development of the secondary market contributes to the efficient pricing and liquidity of carbon allowances.
• Liquidity: The carbon allowance spot market demonstrates weak liquidity, primarily resulting from the limited availability of spot trading instruments and high entry barriers. Exchange markets, however, provide better liquidity than over-the-counter (OTC) markets. The futures market is dominated by short-term contracts, whereas long-term contracts remain illiquid. This pattern aligns with the typical liquidity distribution observed in most derivative markets. As CCMs continue to develop, the introduction of additional secondary market instruments and an increase in market participants can enhance liquidity.
• Transparency: Transparency challenges are related to order book transparency, OTC transactions, and the accessibility of underlying data. Order book transparency varies significantly among CCMs. OTC transaction data are difficult to access. Underlying data are not publicly available, and investors often need paid platforms to obtain such data.