Sustainable Finance Round Up Part 3: Carbon Market Outlook

March 16, 2023 - 4 Minutes 30 Seconds
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Carbon had a run up due to market interest and building regulatory support in 2021 followed by uncertainty and a risk-off appetite in 2022. The backdrop dampened volatility in compliance markets as speculators pared back their positions and fewer challenged views amidst the uncertainty. In voluntary carbon markets, three clear themes emerged: demand for quality, need for standardization, and growth of institutional investor interest.

Compliance Carbon Markets

Energy Crisis Disrupted the EU's ETS Market

Russia's war in Ukraine exploded energy prices. After a year of energy crisis management while governments tried to decarbonize, the European Parliament agreed on reforms to the EU Emissions Trading System (ETS). Notably, free allowance allocations start phasing out in 2026 and disappears in 2034. This coincides with a new Carbon Border Adjustment Mechanism (CBAM), meant to prevent greenhouse gas emissions leakage from imports with less stringent emissions policies.

The European climate law, entitled "Fit for 55", enforces the EU’s climate goal of 55% emissions reductions by 2030. Future European Union Allowances (EUAs) were pulled forward to alleviate near-term price pressures on industries enduring a continental war. EU importers will need to purchase CBAM certificates corresponding to the emissions generated in the production of imported goods at a price calculated by the European Commission.

The EU's CBAM is a further indication that carbon pricing will increasingly apply to companies, and/or their products, even if they are in regions with weaker emissions regulations. In turn, this emphasizes the importance of corporate decarbonization strategies.

In the U.S., 2022 Was a Tale of Two Markets

Regional Greenhouse Gas Initiative (RGGI): The RGGI market muscled through ongoing uncertainty that could continue into 2023. The continued participation of Virginia (23% of the total 2023 allowance budget) remains questionable. While the addition of Pennsylvania could drastically impact the size and future of the program, its involvement also remains uncertain. This participation ambiguity has delayed reviews of the RGGI program, but a draft plan is expected by Q4 2023.

Western Climate Initiative (WCI): The Ukraine-Russia conflict knocked the California compliance market prices down 28% in March. The market rebounded somewhat after the U.S.' new IRA law left many bullish for 2023.

By November, the California Air Resources Board (CARB) released its updated 2022 Scoping Plan, detailing more aggressive ambitions to cut emissions 48% below 1990 levels by 2030 and 85% by 2045. Additionally, CARB reported that the number of registered compliance accounts grew to a new record of 799 entities in Q4 2022.

Compliance Carbon Markets 2023 Outlook

Speculative investor interest declined from H1 2022 highs due to market conditions. However, a program review and the potential inclusion of more states are anticipated through 2024 opening favorable entry points into the market for new participants. Ahead of the 2023 banked allowance oversupply review, supply/demand balances could tilt and lead to higher overall pricing. Despite carbon market pricing far from its highs, many investors may wait for bullish participants to re-enter the market.

Voluntary Carbon Markets

If 2021 helped to mainstream voluntary carbon markets (VCM), 2022 continued to grow these markets with three overarching themes for the year:


In 2022, quality dominated conversations about the voluntary carbon market – specifically regarding project additionality, crypto related initiatives, as well as the heterogeneity of underlying projects. Third-party assurances of "quality" stepped in, including the emergence of project rating firms and project due diligence on behalf of buyers.

Drive for increasing standardization

To increase confidence in project quality at scale and standardize offset project design, several market-led initiatives launched and expanded in 2022. The Integrity Counsel on the Voluntary Carbon Market (ICVCM) outlined an approach to create a "definitive global threshold standard for high-quality carbon credits." On the buyside, the Voluntary Carbon Markets Initiative (VCMI) and the SBTi published new codes and best practices. In late 2022, the International Organization of Securities Commissions (IOSCO) began outreach to determine what, if any, role it should play in the VCM.


Given the potential growth trajectory, institutional capital took an active role in both M&A and equity raises. With greater momentum amongst corporates leveraging offsets as part of their net-zero plans, underlying VCM are expected to grow to up 25x by 2030. Factoring in derivatives markets on the scale of the compliance markets, this may lead to VCMs in the hundreds of billions in the latter part of the decade.

Voluntary Carbon Markets 2023 Outlook

2022 saw a growing convergence around the definition of 'quality' paired with market standards. Through 2023, institutional capital and diversity of market participants is anticipated to continue, noting strong VCM growth expectations amongst private equity, pension, and sovereign wealth funds.

TD Securities' ESG Solutions Team

TD Securities' ESG Solutions team is the centralized ESG expert resource, delivering financing advisory services, thematic and investor insights, and carbon markets solutions to help clients reach their goals.

Series Overview

Our ESG Insights series presents clients with thematic trends, investor perspectives, as well as sheds light on carbon, debt, and equity capital markets, and more.

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Photo of Bridget Realmuto LaPerla

Director, ESG Solutions

Photo of Bridget Realmuto LaPerla

Director, ESG Solutions

Photo of Bridget Realmuto LaPerla

Director, ESG Solutions

Photo of Andrew Hall

Managing Director, Carbon Markets Advisory, ESG Solutions

Photo of Andrew Hall

Managing Director, Carbon Markets Advisory, ESG Solutions

Photo of Andrew Hall

Managing Director, Carbon Markets Advisory, ESG Solutions

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