Carbon Trading Markets

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Origins of carbon economy and carbon finance

Some atmospheric gases, mainly carbon dioxide (CO2), but also methane (CH4), halocarbons (HFCs and PFCs), nitrous oxide (N2O) and sulphur hexafluoride (SF6), are called greenhouse gases (GHG): they act as a natural blanket retaining the earth's heat.

Human activity increases the blanket's thickness causing significant potential global warming with multiple consequences. Some countries have developed greenhouse gas emissions (GHGs) control systems with the aim of limiting climate change through reduction of greenhouse gases. These policies are based on the principle “polluter pays”

The politics are based on some key mechanisms Monetary financial similar concepts
Accounting systems: Regional registry systems (country level, Europe, worldwide) allow participants (industries) to track their greenhouse gases emissions units (GHGs) through carbon accounts. The measurement unit is the "ton carbon equivalent" volume of gas emitted (t CO2 eq).

Monetary unit
Central Bank
Custodian bank

Regulation: greenhouse gases emissions quotas are defined for a given period by geographic area and by industry. Timeframe cap and reduction targets are set. Such constraints policies and market mechanisms are called the "cap and trade" system.

Monetary policy
Credit policy

Enforcement/Compliance/Control & Incentive System:

  • Monitoring the allocation of new rights issuance and incentives to invest in "clean" projects
  • Monitoring the use of quotas : fines in case of emissions above the allowed quotas

Money supply
Report statements
Accounts certification

Free market system to allocate carbon resources:

  • organised markets to buy/sell emission quotas (to manage emissions when they exceed/are below the owned quotas),
  • derivative products to protect from future price's variation (hedging) or to benefit from arbitrage opportunities (trading).
  • OTC (over the counter transactions).
Regulated market
OTC Market
Speculative bubble …

“Carbon finance” is the name given to the mechanisms and markets used to exchange and trade GHG (greenhouse gas) emission quotas.

Mandatory trade and management of CO2 emissions systems go back to the 70's. The first implementation of a similar system was developed in the United States from the 90's. Its aim was to regulate emissions of a gas which causes acid rain, sulphur dioxide (SO2).

Nowadays, the carbon economy and finance are in constant evolution, with differences depending on geographical zones . The carbon economy is considered as being one of the major challenges for the XXIst century's economy.

Regulatory frameworks and markets

There exist several carbon regulatory frameworks in the financial markets, based either on international treaties or on private law contracts. Each of them defines an emission allowance trade and exchange system: the organised carbon markets.

There are also alternative mutual agreement transactions systems –organised outside carbon markets: OTC - Over The Counter.

Regulatory frameworks

Kyoto Protocol

The Kyoto Protocol establishes an emissions trading system. It included a target to reduce greenhouse gases by an average of 5% over the period 2008-2012 compared to 1990 levels.

The participants (industries and countries) are the following:

  • 5 industrial sectors located in 25 EU countries (listed in appendix 1 of the Kyoto protocol ): power and heat generation, mineral oil refineries, iron and steel, pulp and paper, building materials (cement, ceramics, and glass)
  • 5 industrial sectors located in countries outside EU: Japan, Australia, NZ, Russia, Ukraine, Canada, etc. (listed in appendix 1 of the Kyoto protocol)
  • India, Brazil, China, etc. (listed in annex 2 of the Kyoto protocol)
Regulatory texts Main markets Carbon products
  • For the 5 industrial sectors in the 25 EU countries: Kyoto Protocol + European Union Emissions Trading Scheme - EU ETS
  • For the 5 industrial sectors from countries outside EU: Kyoto Protocol
  • For countries listed in annex 2 of the Kyoto protocol: Kyoto Protocol regulatory regime applied to countries listed in Annex 2 : not submitted to reduction constraints
Organised markets:
  • ECX (ICE)
  • EEX (Eurex)
  • Nord Pool (Nasdaq OMX)
  • Bluenext (Euronext + CDC)
  • ...
  • Quotas  (EUA) : spot, futures and options
  • Carbon credits convertible into quotas (CER,ERU) : spot, future, options

Regional regulatory frameworks (outside Kyoto)

These regulations are based on quotas and regional objectives.

Energy sector of 10 states of the USA

Regulatory text Main markets Carbon products
RGGI - Regional Greenhouse Gas Initiative Organised Market RGGI RGGI Quota

10 states from the USA and Canada

Regulatory text Main markets Carbon products
WCI - Western Climate Initiative Organised Market WCI WCI Quotas

Electricity sector of New South Wales (AUS)

Regulatory text Main markets Carbon products
GGAS - Greenhouse Gas Reduction Scheme Organised Market GGAS GGAS Quotas

7 states from the USA and Canada

Regulatory text Main markets Carbon products
Midwestern Greenhouse Gas Reduction Accord Organised Market in project In project

Regulations in project phase / ratification phase


Regulatory text Main markets Carbon products
Canadian federal law under consideration MCeX – Montreal's Climatic stock exchange (along with CCX) Canada CO2e Units Futures

Voluntary markets

These regulated trade and exchange systems not committed to Kyoto nor to other regional agreements. Quotas and reduction targets are defined on a voluntary basis.

Regulatory texts Main markets Carbon products
Chicago Climate Exchange standard
  • Voluntary markets CCX
  • CCFE - Chicago Climate Exchange Futures
  • Quota CFI (Carbon Financial Instruments)
  • Credit VER, CER
  • Spot, future, option
NYMEX- Green Exchange standard Voluntary market NYMEX- Green Exchange
  • Quota EUA
  • Credit CER, VER, VCU
  • Spot, future, swap
Voluntary Carbon Standard Voluntary markets launchings:
  • CDC's VCS Registry
  • APX
  • TZ1 (NZX)
Carbon credits VCU, CER

Trading outside regulated frameworks

Main markets Carbon products
OTC Markets Customised products

The emergence and development of the new carbon markets is heavily dependent on the evolution of regulatory frameworks (some are still in their design/experimental phase).

Calendar of Kyoto

See below for the main stages of the implementation of the Kyoto protocol which governs regulated markets as ECX, EEX, the North Pool, Bluenext


Carbon Registry Systems and operations

Registry systems (allowance accounting)   record emission allowances:

  • by geographical zone,  
  • by country,
  • by industrial actor (ultimate emitter).

They also record operations concerning allocation and exchange of carbon allowances: initial allocation, purchase, sale, obtaining of new rights, etc.

Kyoto protocol carbon accounting units and operations

Registry systems keep track of the emission allowance allocations defined by the Kyoto protocol regulatory framework.
Registry systems are also necessary for monitoring the activity of Kyoto participants (industrial or country) from one of the 3 Kyoto mechanisms (known as Kyoto flexibility mechanisms):

  • Emissions Trading : trading system allowing the sale/purchase of “unused” carbon allowance units.
  • The Clean Development Mechanism (CDM) : Acquisition of carbon emission credits, later convertible into quotas, by investing in a Kyoto certified projects (that follow the criteria requirements for CDM project, see below)
  • Joint Implementation (JI) : Acquisition of carbon emission credits, which are later convertible into quotas, by investing in a Kyoto certified projects (that follow the criteria requirements for JI project, see below)

The operations issued from these mechanisms are recorded through the following units of account:



Registry unit

  • Initial Allocation at the beginning of each CO2 emission allocation phase
  • Quotas trading transactions: purchase, sale, etc.
  • Conversion (Swap) of credits into quotas
  • Adjustment between yield and used quotas
  • Audit and control at the end of each phase


AAU Assigned Amount Units

AAU Assigned Amount Units
  • Credits Certification (issued from CDM projects)
  • Trading operation over CDM carbon credits
  • Conversion of credits into quotas 

Credit (certified  Kyoto)

EUA - European Units Allowance

  • Credits Certification (issued from JI projects)
  • Trading operation over JI carbon credits
  • Conversion of credits into quotas 

CER - Certified Emission Reductions

Kyoto protocol and “clean” projects (CDM,JI )


CDM - Clean Development Mechanism JI - Joint Implementation
Eligibility criteria /
Allowance Amount
Additionality criteria : the industrial project has to generate less CO2 than a classic industrial process, this CO2 differential determines the quantity of allocated credit carbon units.
Investor party Industrialised country listed in Annex 1 of Kyoto protocol Industrialised country listed in Annex 1 of Kyoto protocol
Project Host country/party

Developed country listed in Annex 1 of Kyoto protocol

Industrialised country listed in Annex 1 of Kyoto protocol
Project type Renewable energy in China and India (hydraulics, etc.)               Gas plant improvements (Russia, Ukraine)
Certification Mechanisms Cumbersome Process Simplified Process
Allocated Unit account (1 ton eq CO2) CER - Certified Emission Reductions ERUEmission Reduction Units
Projects Approval Kyoto Protocol, CDM Executive Board, UNFCCC secretariat

Kyoto protocol and registry systems

Registry systems used for Kyoto protocol implementation are listed below:


Organised Markets

Organised carbon trading markets are enforced by both GHG international and regional regulatory frameworks.

The most important market legally submitted to Kyoto protocol framework is the ECX-European Climate Exchange (London) market, representing by itself, 87 % of the global market. There exist other markets committed to Kyoto protocol framework: North Pool (Norway), Bluenext (France) and European Energy Exchange / Eurex (Germany). These organised markets are regulated - FSA, AMF, etc. - and have their clearing houses - LCH.Clearnet, the North Pool, etc…

Voluntary Markets

Carbon voluntary markets present more facilities than organised markets:

  • Regulatory framework: is defined by the market operator (ex: Chicago Climate Exchange) or by following a standard (ex: Voluntary Carbon Standard)
  • Emission reduction targets : Industrials have access to the market on voluntary basis
  •  Participants : no constraints on industrial sector nor localisation
  • Tradable Products:
    • carbon products traded in organised markets are also available in voluntary markets
    • Standardised carbon products issued from projects that do not require Kyoto standards certification

Investors participate in voluntary markets for different reasons:

  • To benefit from arbitrage opportunities created by finance carbon evolution
  • To foresight/survey on regulatory frameworks evolutions (financial impacts)
  • Improve society's marketing image through sustainable development (Corporate Social Responsibility).

The leading Voluntary Carbon market is CCX-Chicago Climate Exchange. The CCX trades different carbon allowances issued from a large range of standardized projects: energy efficiency, the renewable energy, the capture of fleeting gases (methane), reforestation, among others. The Voluntary carbon markets are more developed in countries where there is no regulation or where it is under approval. The evolution is prominent across Atlantic (NYMEX-green Exchanges (NY) and CCFE-Chicago Climate Futures Exchange).

Tradable units are defined by each voluntary market. For example, markets following VCS standards (Voluntary Carbon Standard) adopt the following account units and products:


Unit type

Account unit (In 1 ton CO2 eq / year)

  • VCS Certified project
  • Trading
Carbon Credit (Certified VCS) VCU - Voluntary Carbon Units
VER - Voluntary Emissions Reductions or Verified Emissions Reductions

The carbon markets typology