17 Apr 2024

Investcorp, a leading alternative investment firm, today released a new whitepaper, “Greasing the Wheels of Decarbonization: A Primer on the Global Carbon Markets”, describing the emerging importance and the investment opportunities around the growth of the global carbon markets. Just as financial markets “grease the wheels” of the economy by allocating and pricing capital, Investcorp believes the Carbon Markets will play a similarly critical role with decarbonization.

Since they were first introduced almost twenty years ago, the Carbon Markets have grown to an estimated aggregate trading volume of $978 billion in 2022 compared with $851 billion in 2021, up 146% from 2020, and well above the 2012-2017 average size of approximately $55 billion annually. The Global Carbon Markets are expected to reach $2.7 trillion by 2028.

In addition, emissions under the EU’s Emission Trading System (ETS), the world’s first and biggest major carbon market, have reduced by 47% since the ETS was launched in 2005 and are reported to be on track to hit 2030 targets, demonstrating the effectiveness of the Carbon Markets as a key driver for decarbonization.

The paper points out that the Global Carbon Markets are poised for near-term expansion for six major reasons:

1. National decarbonization commitments are increasing and will need to accelerate given warming trends – as these commitments increase, the number of companies and industries required to participate in government-regulated Compliance Carbon Markets (CCM) will grow.
2. Corporations that committed to meeting Net Zero and 2030 decarbonization targets have limited time to act, are facing growing shareholder, activist and compliance pressure to report progress towards these goals and will increasingly look to source high quality offsets on the Voluntary Carbon Markets (VCM) to help.
3. Regulatory oversight is increasing and adding to overall market confidence including from the European Union’s Corporate Sustainability Reporting Directive (“CSRD”) and the U.S. Securities and Exchange Commission recently released carbon emissions disclosure rules.
4. Progress towards standards is also coming from the private sector, illustrated by the Integrity Council for the Voluntary Carbon Market’s “Core Carbon Principles” released last year.
5. Trading volumes on the Carbon Markets are reaching critical mass and beginning to interest a broader group of financial players.
6. The EU’s Carbon Border Adjustment Mechanism or CBAM (a border tax or tariff that applies when carbon-intensive products are imported into the EU) is a game changer for the Carbon Markets as it will catalyze other countries to adopt markets consistent with the EU’s high standards.

“Many of the services and operations that are standardized in other financial markets are at an early stage in the Carbon Markets,” said James Socas, Managing Director & Head of Investcorp Climate Solutions. “As the Carbon Markets grow, they will require new infrastructure, technologies, financial products, trading, and brokerage and consulting services, presenting multiple attractive investment opportunities.”

“While there are important challenges to address to improve governance, oversight and transparency of the Carbon Markets, these are all fixable and on the right path,” said Habib Abdur-Rahman, Investcorp’s Global Head of Sustainability and Managing Director in Climate Solutions. “Continued progress in the Carbon Markets will help accelerate capital flows to climate change mitigation and adaptation projects across the world, and particularly the Global South where resources are critically needed.”

For more information, download the complete white paper here.