Carbon markets have become a central tool for cost-effective emissions reductions. The EU Emissions Trading System (EU ETS), launched in 2005, is the world’s most mature carbon pricing mechanism and has served as a model for many others. However, carbon markets are also evolving in China, North America, the UK, and beyond — each reflecting different policy priorities, economic structures, and levels of ambition.
The EU ETS
The EU ETS covers approximately 40% of the EU’s greenhouse gas emissions and is widely regarded for its comprehensive scope, high-quality data reporting, and continuous regulatory improvements. The system is central to the EU’s climate neutrality pathway, with a steadily declining emissions cap, market-driven pricing, and sectoral expansion, including shipping and road transport.
Its design features are unique and have elevated the EU ETS to a reference point in global policy discussions. These features include the Market Stability Reserve (MSR) to address allowance surplus, and the Carbon Border Adjustment Mechanism (CBAM) to manage carbon leakage (from companies importing from outside the EU to avoid the carbon cap).
The experience of the EU ETS underscores several key principles for designing effective carbon markets:
- Robust MRV systems are essential to ensure environmental integrity.
- Gradual tightening of the emissions cap helps maintain long-term price signals.
- Sectoral expansion and regulatory predictability are crucial for investor confidence.
- Complementary policies (e.g. renewable energy subsidies, energy efficiency measures) enhance the effectiveness of the carbon market.
Global Carbon Markets
While the EU ETS leads in maturity and scope, several other carbon markets offer important points of comparison:
- China’s National ETS: Launched in 2021, it is now the world’s largest carbon market by emissions coverage, currently focused solely on the power sector. Unlike the EU ETS, China’s system relies on intensity-based benchmarks rather than absolute caps, and carbon pricing remains relatively low. However, it is expected to evolve with broader sectoral coverage and improved MRV systems over time.
- California Cap-and-Trade (linked with Quebec under the Western Climate Initiative): Operational since 2013, California’s system covers multiple sectors and includes price floors and ceilings to stabilize the carbon market. It also allows for a limited use of offset credits, including from nature-based solutions — something the EU ETS currently excludes.
- UK Emissions Trading Scheme: Introduced after Brexit, the UK ETS closely mirrors the EU system in design but has implemented a more aggressive cap trajectory. The UK is also exploring the inclusion of negative emissions and carbon removals more explicitly in future phases.
- Regional Greenhouse Gas Initiative (RGGI) in the US: A cooperative program covering the power sector in several Northeastern and Mid-Atlantic states, RGGI uses auction revenue for energy efficiency and clean energy investments. While narrower in scope than the EU ETS, it has demonstrated how regional markets can deliver co-benefits beyond emissions reductions.
- New and Emerging Markets: Countries like South Korea, New Zealand, and several Latin American nations are also implementing or piloting ETS frameworks. Many of these systems are still in early stages, but show potential for future linkage and international cooperation under Article 6 of the Paris Agreement.
The Environment Consultant 