Green and energy

Decarbonisation, potential developments in the CO2 market

The carbon credit sector and the links with natural gas prices. What happens to this energy segment

by Daniela Russo

26 April 2025

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3' min read

Key points

The carbon credit market: what prospects
The effects on natural gas

3' min read

In 2024, carbon market emissions recorded by the European Union Emissions Trading System (EU ETS) decreased by 5 per cent compared to 2023, reaching an overall reduction of 50 per cent compared to 2005 levels, in line with the target of -62 per cent by 2030. The decrease was mainly due to the electricity sector, thanks to increased production from alternative sources (with +8% from renewables and +5% from nuclear), while gas and coal decreased by 8% and 15% respectively. Industrial emissions remained stable, while aviation emissions increased by 15%. Maritime transport was included in the calculation for the first time, with about 72 million tonnes of CO₂ reported in 2024. This is the result of the analysis published by the European Commission based on data reported by the Member States by 31 March 2025.

The market for carbon credits: what prospects

The carbon market, or carbon credit market, is a system that allows companies and governments to buy and sell credits, actual permits to emit greenhouse gases, with the aim of reducing global emissions and mitigating climate change.

For investors, it represents an opportunity to be monitored, not least in light of the current geopolitical scenario, which affects the volatility of the natural gas market, which is inextricably linked to carbon credits.

"We should distinguish voluntary carbon credit markets from cap and trade programmes. The former remain a sub-$2 billion asset class and need substantial improvements in market structure to grow," comments Luke Oliver, Head of Climate Investments at KraneShares. "Mandatory cap and trade programmes have significantly more favourable prospects. Investor portfolios are increasingly exposed to this trillion-dollar market, which is expected to expand and evolve, driven by stricter global climate policies and decarbonisation targets, despite geopolitical uncertainties. The EU has launched the Carbon Border Adjustment Mechanism, which imposes a tariff on CO2 imports from high-emitting sectors, we expect other countries to adopt carbon pricing mechanisms in response. Market linkages are also a possibility: Washington State could link its CO2 credit market to the joint market of California and Quebec, and there could also be a merger between the UK and EU markets. In addition, India and Turkey, two of Europe's largest trading partners, are discussing new CO2 credit programmes'.

Against this backdrop, the return of global CO2 prices to pre-Ukraine invasion levels creates an opportunity to invest or rebalance one's positions in Europe, California or the global basket of CO2 markets to benefit from the policy tightening expected from 2030 onwards, per Oliver.

The effects on natural gas

Another aspect to consider is the development of the gas market. The price of this resource has a direct impact on the level of CO2 emissions. "The two markets can be closely linked and move in tandem, as we have seen over the past month with the correlation between Eua - European Union Allowance and Ttf (Title Transfer facility) natural gas futures averaging 92 per cent,' Oliver comments. 'Some investors have used Eua as a proxy for taking a long position on natural gas, which is cheaper. Volatility in the natural gas market can have an impact on the CO2 market because it influences the choice of fuel used for power generation and thus overall emission levels. Increased volatility can also lead traders to take a more cautious position in commodity markets'.

Continuing geopolitical tensions made the natural gas market very volatile. European TTF gas prices reached multi-month highs in late January, only to fall following news of potential ceasefire negotiations between Russia and Ukraine. Since that peak, prices have plummeted more than 65% in early April, with market sentiment continuing to fluctuate as traders assess the likelihood of a resumption of flows from Russian pipelines, potential tariffs on US imports, and new revisions to the European Commission's gas storage policies.

"Despite the uncertainty," Oliver concludes, "the market still does not want to include Russian gas in its supply forecasts for the summer or winter season. A recent attack on the Sudzha transit hub in western Russia, one of the main routes for gas flowing to Europe via Ukraine, has further restricted supply, while three of the four Nord Stream pipelines continue to be non-operational. However, European gas traders have yet to fully price in the demand needed to adequately replenish stocks for the coming winter. Uncertainty over the ceasefire and negotiations continues to make the market outlook unclear, leaving traders without a clear direction to follow'.