A Student’s Research from Renoster’s Carbon Course: Will Carbon Markets Recover?
As part of Renoster’s inaugural carbon course, participants wrapped up their experience by diving into a final research assignment on a topic of their choosing. These projects gave students a chance to apply what they’d learned, explore a specific area of interest, and contribute to the broader conversation on climate solutions.
We’re proud to showcase one of the standout submissions here by course participant, Miguel Jiménez Admetlla: The Post-Guardian Era: Will Carbon Markets Recover? In the wake of a turbulent year for voluntary carbon markets, this paper explores where things stand today and what the future might hold. From the resilience of compliance markets like the EU ETS to reform efforts underway in the voluntary space, it outlines both bearish and bullish arguments for where carbon markets go next. It’s a thoughtful, data-driven take on a market at a turning point. Enjoy reading below!
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The Post-Guardian Era: Will Carbon Markets Recover? What are bearish and bullish arguments for the market’s future? What do data/media/investments/posts show?
Written by: Miguel Jiménez Admetlla
Following the credibility crisis that shook the voluntary carbon markets (VCMs) in early 2023, the broader carbon market landscape faces a dual reality. On one hand, VCMs remain in a deep correction phase; on the other, compliance (or compulsory) markets such as the EU ETS show signs of institutional maturity and potential resilience. This bifurcation prompts a critical question: Will carbon markets recover and fulfill their climate mitigation promise?
This analysis will give an in-depth review of the bearish and bullish drivers that may elevate or decline carbon markets. To do so, I will treat separately compulsory/quasi-compulsory and voluntary markets. Even though there is a lot of interplay between both markets I will be referring to voluntary to those markets composed of credit registered under the four major registries and the smaller ones, and to compulsory, to those markets characterized by allowances regardless of whether they admit offsets in their schemes.
Compliance Markets
Given the numerous Emission Trading Schemes (ETSs), 36 according to the latest World Bank’s report, I consider best to focus on the oldest and most developed one even though this may not be representative of the newer versions but may set the path that all ETS will walk eventually.
Nonetheless, before diving into the European Union Emission Trading Scheme (EU ETS), the prospects for national ETSs worldwide seem to be optimistic. As of April 2024, in terms of global emission coverage, considering also carbon taxes, compulsory carbon markets across the world represented 24%. Potential developments point for this number to be raised by 6 percentage points. In the last years, we have seen big polluters committing to launch domestic schemes. That is the case for Indonesia, Turkey, India, Brazil and Argentina which currently rank 6th , 17th , 3rd, 5th and 22nd in the polluting list respectively.
There is still an important gap to meet the ambitious 60% coverage by 2030 established by the Global Carbon Pricing Challenge
Pricing also remains distant from ideal scenarios. According to the Sixth Assessment Report (AR6) by the Intergovernmental Panel on Climate Change (IPCC), the marginal abatement cost to limit warming to 1.5ºC per ton of tCO2 should sit between 226 to 385 in 2024 USD terms. Figure 1 shows that no allowance from no scheme meets the floor cost. Hence, besides coverage, the social cost of carbon has not been fully integrated by these markets.
Considering these drawbacks, more strict climate policies in the right direction may strengthen existing schemes and inspirate incoming schemes to commence with the right footing.
Taking this into account, the oldest and most successful domestic scheme is the EU ETS. It is estimated that since its conception, emissions from power and industry sectors covered by the EU ETS has decreased by approximately 47%. Even though it is hard to establish causality, it can be argued that this tool has lived long enough to be properly equipped to achieve sound decarbonization.
Figure 2 shows EU ETS’s price history and reveals the obstacles a tool of this sort must go through before it serves its purpose. Just as with VCMs, the EU ETS has undergone 4 phases. The first three phases were very experimental and therefore prices were never able to break the 30€/ton ceiling. A mismatch between supply and demand of allowances proved to be the biggest price surge constraint during these stages. Among the reasons: the provision of free allowances, weak economic activity due to the financial recession, the lowering prices of renewables and the price spread between allowances and the CDM offsets which at the time could be used as an alternative to allowances.
These experiences motivated an overhaul of the scheme. Besides the total cancellation of offsets, two actions to bring prices up are worth mentioning. Firstly, the package known as the Market Stability Reserve (MSR) acted as a Central Bank either injecting or withdrawing liquidity to stabilize prices. Secondly, a tighter grip on supply was ensured by establishing an annual reduction factor of allowances. This reduction started at 1.74% until 2020, then increased to 2.2% and from 2024 onwards it has increased to 4.3%.
These actions proved effective, and by 2018 the trend was reversed, making prices increase fourfold reaching 20€/ton. After the stagnation motivated by Covid, prices kept on increasing reaching their all-time high. Producers were returning to coal since the supply of natural gas was compromised because of the sanctions imposed to Russia after its invasion of Ukraine.
Sanctions compromised the EU’s main source of Liquified Natural Gas (LNG). Nonetheless, fears of an energy crisis prompted a quick reaction, and the continent quickly found alternative providers, bringing LNG as well as allowances prices down once again.
However, a lasting impact of this experience has been the correlation between natural gas prices and carbon. Historically, the correlation between gas prices and EUAs has been low, around 0.12. In October 2023, the 5-day rolling correlation between gas prices and carbon allowances reached 0.9. Even though it has lost momentum since then, it has been an EU ETS price determinant since the war outbreak and something to watch closely in the following years.
Besides serving as an inspiration for developing domestic carbon markets, the EU’s latest climate policy tool serves as an indirect push for these markets to increase their allowances’ prices. The Carbon Border Adjustment Mechanism (CBAM) is a climate policy tool introduced by the European Union to prevent carbon leakage and ensure a level playing field between EU industries and foreign producers. It applies to carbon prices on certain imports—such as steel, cement, aluminum, fertilizers, electricity, and hydrogen—based on their embedded greenhouse gas emissions.
By aligning the carbon cost of imported goods with that faced by EU producers under the EU Emissions Trading System (ETS), CBAM incentivizes cleaner production globally and supports the EU’s goal of climate neutrality by 2050. This alignment provides an incentive for governments outside of the EU to either improve their existing domestic markets or establish one if they did not have one in the first place. These are some of the following reasons that back up this argument:
- Signal of global carbon pricing convergence: CBAM raises the bar by externalizing the EU’s internal carbon price, pressuring other countries to introduce or strengthen their own carbon pricing mechanisms to avoid paying the CBAM levy.
- Incentive for domestic schemes abroad: CBAM raises the bar by externalizing the EU’s internal carbon price, pressuring other countries to introduce or strengthen their own carbon pricing mechanisms to avoid paying the CBAM levy.
- Market integration effect: by making carbon pricing a trade issue, CBAM effectively integrates carbon into the cost of doing business internationally, which increases demand for robust, credible domestic carbon pricing schemes—potentially raising allowance prices where such markets already exist.
- Compliance push: To avoid trade frictions, some non-EU countries may improve the transparency and stringency of their carbon pricing systems, making them more market-relevant and boosting prices.
Even though prices of other commodities are currently determinant for allowances in the short horizon, the complementary tools developed to refine the scheme have proved to be successful. The EU ETS price has grown since its inception and as seen in Figure 4 has the potential to get closer to the real cost of pollution. Countries should try to emulate this model to a certain extent and have the advantage of avoiding all the obstacles the EU has encountered along the way. Of course, one must consider heterogeneous effects and new context-dependent problems may arise in the countries that follow suit.
Lastly, the CBAM, despite the easing in terms of administrative tasks that the Omnibus Package is set to establish, represents the final push for a convergence in compulsory carbon markets prices.
Voluntary Markets
Following the credibility crisis that shook the voluntary carbon markets (VCMs) in early 2023, the carbon offset landscape faces intense scrutiny. The once-promising rise of VCMs—driven by corporate net-zero pledges and ESG commitments—has slowed dramatically amid growing doubts over credit integrity, additionality, and permanence. The critical question now is whether VCMs can regain trust and fulfill their intended role in global decarbonization efforts.
The downfall began with widespread media investigations, most notably by The Guardian, which exposed serious flaws in some of the most prominent offset projects. It was revealed that inflated sequestration claims, questionable baselines, and poor monitoring have plagued the system. This has led to a significant drop in demand from corporate buyers wary of reputational risk. Average VCM credit prices dropped to just $4.80 per tonne in 2024, reflecting both waning confidence and oversupply. By comparison, compliance market prices like those in the EU ETS exceeded €90/tCO2e in the same period, as shown in Figure 2. This highlights the disparity in market strength and perceived credibility. Table 1 shows the decrease in volume, value and prices between 2022 and 2023, the year of the scandal.
Credit type also plays a significant role in pricing divergence. Avoidance-based credits, such as those from avoided deforestation (REDD+), have traded at particularly low levels—often below $3/tCO2e—due to ongoing questions about permanence and baseline inflation. In contrast, high-quality removals, especially engineered solutions like direct air capture or biochar, can command prices above $100/tCO2e, though transaction volumes remain small.
Moreover, the lack of regulatory oversight continues to fuel market skepticism. Unlike compliance markets, VCMs depend heavily on voluntary commitments, which can easily shift with corporate priorities or economic pressures. Without enforceable rules, high-integrity projects struggle to compete, trapped in a cycle where low prices discourage investment in quality, and low quality undermines trust.
Despite these challenges, some analysts remain cautiously optimistic. A wave of institutional reform is underway among the major registries (e.g., Verra, Gold Standard), who are working to tighten methodologies and align emerging international standards such as the Integrity Council for the Voluntary Carbon Market’s (ICVCM) Core Carbon Principles (CCPs). These principles aim to define what constitutes a high-integrity carbon credit, focusing on robust quantification, additionality, permanence, and strong social and environmental safeguards. If widely adopted, they could help create a tiered market in which credits verified against CCPs trade at a premium.
Complementing this effort, the Voluntary Carbon Markets Integrity Initiative (VCMI) has launched guidance to ensure that claims made by credit buyers are credible, transparent, and do not substitute for direct emissions reductions. Together, the CCPs and VCMI Claims Code provide a dual framework—supply-side and demand-side—for restoring credibility and investor confidence.
There is also growing recognition that VCMs serve a complementary role alongside compliance markets, especially in sectors or countries where regulation is weak or absent. Nature-based solutions (NBS), which provide co-benefits for biodiversity and local communities, still attract niche investment despite broader market headwinds. While prices for NBS credits have fallen—typically ranging from $3 to $10/tCO2e—projects with strong co-benefits or verified under more rigorous standards can exceed this range.
Sentiment analysis of social media and sustainability reporting suggests the public remains skeptical of VCMs but open to reform. Institutional investors, however, remain on the sidelines, awaiting greater standardization and regulatory clarity. Unlike the bullish trend in regulated allowances, voluntary credit investments have not yet recovered, and project financing is concentrated among a small group of high-profile developers. Some venture capital and blended finance initiatives are exploring new models tied to removal credits or forward contracts under high-integrity frameworks, but scale remains limited.
Conclusion: A Market at the Crossroads
VCMs are in a pivotal phase. Their survival—and eventual recovery—hinges on successful structural reform, the adoption of internationally recognized standards like the CCPs and VCMI, and a shift from volume to value. If project developers, certifiers, and buyers prioritize environmental integrity and transparency, voluntary markets could evolve into a credible complement to regulatory systems. Otherwise, they risk marginalization in the carbon pricing ecosystem. As compulsory markets continue to strengthen—gaining momentum from tools like the EU ETS and CBAM, and nearing price levels recommended by the IPCC (USD 170–290/tCO2e)—VCMs must demonstrate their ability to deliver real, verifiable climate benefits or risk being sidelined in a rapidly maturing global carbon market framework.
