Top 5 Developments to Watch in Carbon Markets by 2025
In the year 2025, major changes are expected in compliance carbon allowance programs globally, potentially redefining the market outlook. Here are five pivotal developments to watch out for this year:
Finalization of CCA Reform:
The California Cap-and-Trade Program is gearing up to complete comprehensive reforms in the ongoing year. The past delays and uncertainties in market reforms had a significant impact on CCAs in 2024. While the process was pushed back, the reforms are now being expedited with a tighter timeframe to achieve the same goals. These reforms are in response to increased targets set by AB 1279, aiming for an 85% reduction in greenhouse gas emissions from 1990 levels by 2045. To align with these ambitious goals, the emissions reductions for 2030 are set to increase from 40% to 48%.
Increased Demand for EUAs from New Compliance Updates:
Anticipated changes in the EU Emissions Trading System (ETS) are expected to drive up the demand for EU Allowances (EUAs). Notably, the maritime sector, which was required to surrender EUAs for 40% of its emissions in 2024, will see this requirement increase to 70% in 2025 and up to 100% by 2026. This shift is likely to introduce an additional demand of 80 million tonnes, as 70% of maritime emissions will be incorporated into the ETS by 2025. Furthermore, the aviation sector is adjusting to the removal of free EUA allocations, which is expected to encourage greater market participation.
Discussions on Linkages and New Entrants:
Washington is engaged in discussions about linking its carbon market with the Western Climate Initiative (WCI). While Washington’s market is smaller than the California-Quebec joint market, it has the potential to exert considerable influence if linked. An integrated market could enhance trading environments across these jurisdictions, potentially leading to an increase in prices. In 2025, the Washington State Department of Ecology (ECY) is expected to introduce regulations to facilitate linkage between Washington and California-Quebec.
CBAM’s Influence on Global Carbon Markets:
The EU’s Carbon Border Adjustment Mechanism (CBAM) is expected to have a significant impact on global carbon markets. By aligning carbon costs for imports with EU pricing, CBAM is likely to encourage other countries to develop or strengthen their carbon markets to avoid EU/UK carbon tariffs. This push for global alignment could see the coverage of emissions under cap-and-trade programs expand from 18% to 28%, potentially tripling the investable carbon market by 2030 to an estimated $2.5 trillion.
Kickstart of NY Cap and Invest:
New York State is working on the Cap-and-Invest Program (NYCI) to reduce greenhouse gas emissions, aiming to establish the US’ third largest cap-and-invest market. The market size could reach $5.6 billion once operational, but the implementation timeline might be delayed to 2026 due to an extended comment and review period.
These developments bode well for the KraneShares Global Carbon Allowance ETF (KRBN), which provides exposure to the world’s largest and most liquid carbon allowance futures. Incorporating strategic investments in emerging carbon markets, such as the UK and Washington state, KRBN remains well-positioned to capitalize on evolving trends in the carbon allowance sector.
