Opportunity for UK to be world leader in carbon markets

17 May 2023

New research from TheCityUK, in partnership with ICE, shows the increasingly important role carbon markets are playing in reaching net-zero targets, their rapid growth in recent years, and the opportunity for the UK to be a world-leader in their development.

While there are currently no precise figures to quantify the overall growth of carbon markets, the total global revenue generated from carbon tax initiatives – one key carbon pricing instrument – offers some insight, increasing by nearly 209% in the decade to 2021 to US$28bn.

The report, ‘Global carbon pricing mechanisms and their interaction with carbon markets’, shows how financial markets have adapted to value factors such as pollution and carbon sequestration, enabling firms and policymakers to quantify, manage and value the environmental impact of their activities.

With the use of environmental markets becoming more widespread and an increasing number of firms making net-zero commitments, the financial and related professional services industry is innovating in climate finance to allow for the effective allocation of resources into carbon projects that avoid, reduce, or remove carbon emissions.

One key area hampering the future development of carbon markets is the lack of robust, comparable data about the performance of carbon markets. More accurate and comprehensive monitoring will help to address this by improving general understanding of carbon markets and helping them to further scale.

Anjalika Bardalai, Chief Economist and Head of Research, TheCityUK, said, “Carbon pricing instruments lay the foundation for carbon markets, and these markets are an increasingly important tool to help meet net-zero carbon emissions targets. To the extent that we can quantify growth in this area given robust data are scarce, it is clear that carbon markets have experienced rapid growth in recent years, albeit from a low base.

“However, appreciation of the sophistication of instruments like cap-and-trade systems and carbon allowances is generally limited to a relatively small pool of subject-matter experts. Building a more widespread understanding of the role and importance of these markets will help government and society marshal the resources needed to meet the net-zero targets so important to combatting climate change.”

Gordon Bennett, Managing Director of Utility Markets at ICE, said, “Environmental markets provide the price signals to efficiently allocate capital across the carbon cycle and to manage the uncertainties in meeting net zero. Together, energy and environmental markets support an efficient transition from high to lower carbon energy generation, creating an asset class for carbon sinks and valuing factors like pollution, carbon sequestration and renewable electricity while incentivising behavioural change, and helping erode any additional cost of clean energy over fossil fuels.

“The UK is home to where the world’s energy and environmental markets - valued in the trillions - are cleared, as well as being a global leader in decarbonising electricity generation by combining market-based principles with thoughtful policy. The UK has a unique position to bring knowledge of environmental markets to a broader audience.”

The ‘Global carbon pricing mechanisms and their interaction with carbon markets’ report is the latest in a suite of research from TheCityUK on sustainable and green finance.