Carbon Risk 2025 year in review

A little over four years ago, on 16th November 2021, I published my first article on Carbon Risk.

But over the past two years the date came and went, and by the time I thought about writing an article to mark the occasion, the moment had passed, something more interesting had surfaced, or I was more interested in tucking into some mince pies and sipping mulled wine.

This year I thought I would do a roundup of the most important themes covered by Carbon Risk this past year, as well as some of the things to watch out for as we move into 2026.

The links below all refer back to other articles I have written this year, but if you want to get a more comprehensive lowdown on every article I've published since day one of Carbon Risk (over 400 of them and counting!), check out the Table of Contents.

Before I get to it, I'd like to thank everybody for the support they have shown, and particularly during the past few months as I migrated the newsletter away from Substack. The move went much better than I could have imagined with a nice jump in the number of people taking out a paid subscription to Carbon Risk.

Thank you very much :)

With that out of the way, here are the six main themes that I have covered during 2025, followed by my early thoughts on what could be in store in 2026.

1. Carbon credits experiencing a renaissance

The voluntary carbon market is dead. Long live the verified carbon market. In an article published in October, I highlighted how the term 'voluntary' increasingly feels disconnected from the emerging consensus as to how the VCM is likely to evolve. More and more stakeholders are coming round to the view that 'verified' carbon market makes a lot more sense given the increasingly robust verification systems in place: research, monitoring, reporting, auditing, and engagement.

A broader acceptance of the role that carbon credits have to play also comes courtesy of the Science Based Targets initiative (SBTi). Up until very recently, the go-to arbiter of corporate climate action had been very anti-carbon credits, effectively calling for companies to pursue every route to internal carbon abatement whatever the cost.

The release of the latest iteration of its Corporate Net Zero Standard (CNZS) shows a change in approach, introducing a "recognition program for climate contributions" that encourages and rewards companies for demonstrating "ongoing emissions responsibility". In particular, by directing companies to impose internal carbon prices, SBTi enables signatories to targets to meet them by purchasing high quality carbon credits.

While action by companies outside of regulations is important, emerging compliance carbon pricing mechanisms (including many of the new country-based schemes in Asia, and the airline emissions scheme, CORSIA) are underpinning the revival in the use of carbon credits. The credits, and the projects they are based on, are increasingly seen as a means to get the biggest bang per buck in terms of emissions mitigation, a way to help reduce the cost of compliance, and a mechanism to help fund and direct climate finance.

Enter the EU's 2040 target proposals. The European Parliament recently voted in favour of cutting net emissions by 90% compared to 1990 levels by 2050, backing an earlier agreement reached by the European Council which also includes allowing up to 5% of the emission reduction to be achieved through the purchase of international carbon credits. Europe's carbon market is still living with the consequences of allowing international carbon credits, so the hope is that it has learnt from the past.

As I explain in a recent article there are four motivations behind this move: containing the cost of meeting targets amid the risk of a backlash, helping to shape the rules by which carbon credits are traded, a channel by which Europe can fund global climate mitigation and adaptation, and finally, a way for the bloc to position itself as the de-facto regulator and enabler of international carbon markets.

2. Plurilateral climate agreements are the way forward

Following the United States decision to leave the Paris Agreement, any hope that countries would come together in the future in pursuit of multilateral climate agreements was understandably wearing thin. Even more so, the chances of a global carbon pricing mechanism being approved - long the dream for many economists - was a flight of fancy.

But then in April, something unexpected happened. Shortly before Easter negotiations over a carbon pricing mechanism for the global shipping industry was voted through by an overwhelming majority vote (63-13). Although the mechanism (known as the Net-Zero Framework) was far from perfect, and was unlikely to deliver the cuts in emissions targeted by the International Maritime Organisation (IMO), the agreement nonetheless represented a major victory for climate policy multilateralism.

All the IMO had to do was get the motion passed at a meeting in October and the carbon pricing mechanism would have come into force in 2027. Unfortunately things didn't quite go to plan. In the face of intimidation, including threats to impose tariffs, penalties and revoke visas, the US administrations officials managed to strongarm enough countries into voting against the bill, or at least abstaining. The final vote count: 57 in favour of delay, 49 countries against delaying, and 21 abstentions.

The policy uncertainty pervading the shipping industry will mean that operators either sit on their hands as long as possible, or go for a 'safe' choice in the absence of suitable alternatives. For many that will mean investing in dual-fuel ships that primarily burn LNG or traditional maritime diesel or heavy fuel oils. Good news for the US LNG industry perhaps.

While the wait for a multilateral agreement involving the vast majority of the worlds nations goes on, it doesn't mean that countries can't come together and move things forward. The "intransigent minority" still have the capacity to drastically shape the future. A group of nations just need to provide a suitable enough incentive to join the club, or apply a penalty to those that don't. It's here where regional-based carbon pricing, coupled with trade agreements are likely to play a powerful role. Plurilateral agreements are the way forward.

3. Political uncertainty weighs heavily on carbon markets

Never too far from the surface, political interference re-emerged as a potent risk for carbon markets - both old and embryonic - in 2025. The election of Donald Trump for a second term sowed climate policy uncertainty far and wide. In late 2024 opposition parties as far afield as Canada and Australia were quick to paint carbon taxes and carbon pricing mechanisms as the 'pantomime villain' in the hope that it would lead them to electoral success.

Nevertheless, it was in America that the threat to carbon pricing proved greatest. High up on the list of potential casualties was California, one of the oldest carbon pricing mechanisms and due to expire in 2030. The absence of long-term policy certainty, delays to the programs legislation process, along with other climate policy delays, compounded the sense of unease felt by market participants.

And then Trump threw in the grenade that was executive order 'PROTECTING AMERICAN ENERGY FROM STATE OVERREACH', singling out California for apparent overreach. The states carbon market eventually got its extension to 2045 signed-off, and a report tabling actions that the federal government could take in response never materialised. That much is good news. However, the uncertainty that the storm brought was felt far and wide, and served to scupper plans to fast-track carbon pricing to New York and other states keen to emulate California's success.

Cracks started to appear in other jurisdictions that you wouldn't normally expect. First, Canada's new prime minister Mark Carney carried out an election promise to immediately withdraw the consumer carbon tax. The European Union decided to delay the introduction of the blocs second emissions trading scheme, ETS2 by one year to 2028, while also introducing additional measures to curb prices. More recently, New Zealand announced that it would sever the link between its emissions trading scheme and the governments Paris Agreement targets. Carbon markets are built on trust, and even if there are sound reasons to make a change, poor communication and unclear decision making can easily damage confidence.

As I noted back in the summer, one of the first pushbacks I get from investors nervous about allocating to carbon markets is the risk of political interference. Take a step back though and you can see that politics is often the driving force behind many of the biggest moves in global asset markets. The past twelve months exemplifies how politics can shape every corner of our financial markets, even if over the very long run underlying economic fundamentals hold sway. As with carbon markets, the rules for investing in equities, commodities and bond markets, are also frequently rewritten by their political masters. If you understand the game then you can stay one step ahead.

4. Repurposing carbon markets with a broader social license

Mark Carney's book, Values: An Economists Guide To Everything That Matters makes a strong argument that markets can be fragile if they fail to serve the needs of society, “Markets are not ends in themselves, but powerful means for prosperity and security for all. As such they need to retain the consent of society - a social license - to be allowed to operate, innovate and grow.”

In January I highlighted why governments should follow Washington State's lead and adopt the term 'Cap-and-Invest', and ditch 'Cap-and-Trade'. As I say in the article, instead of emphasising the ‘trade’ in allowances by regulated entities and investors (speculation always gets a bad rap), ‘invest’ pivots the narrative towards actual projects that enable households and businesses to cut emissions. In September, California's governor formally announced that the states carbon market had also been renamed 'Cap-and-Invest'. Other jurisdictions should follow suit.

But a strong name is not enough. It's more important than ever that governments demonstrate that carbon pricing actually serves the needs of its citizens. It means selling the immediate short to medium term benefits, without losing sight of the longer-term goals.

As an example I suggest that governments should re-target their efforts towards clean air, switching the narrative away from the multidecadal challenge to decarbonise, and towards the clear and immediate health and economic benefits of cutting air pollution. The latter much more salient to people than any reduction in carbon emissions. Importantly, the same policies that are so effective in cutting carbon emissions (such as carbon pricing mechanisms) have also been shown to cut air pollution too.

More needs to be done to ward off political risk if carbon markets are going to continue to play a role in cutting emissions. The issue of 'affordability' is key. The decision to delay the start of ETS2 in Europe, and relax the cap trajectory in California should be seen in this light. In Europe, ETS2 could have an especially negative impact on the rural poor in Eastern Europe. In California, high carbon prices could be a lightening rod for critics in the next US presidential election.

Push carbon prices too high, and a political backlash isn't the only risk governments face. Fiscal revenue - either via carbon price taxation, or the revenue raised in the auction of allowances - is increasingly important to governments. Push the carbon price too high and industries may lose competitiveness, and potentially lead to carbon leakage to other countries with less ambitious climate policies.

5. Tackling this one super-pollutant should be top priority

Methane is thought to be responsible for nearly half of net global warming to date. Tackling this one super-pollutant is the fastest way to slow down the rate of warming in coming decades.

In 2021 countries came together, committing to tackle the problem. The Global Methane Pledge (signed by more than 150 countries, including the United States) targeted a 30% reduction by 2030 compared with 2020 levels. However, halfway through the commitment, signatories are well off-track. One major sticking point is the lack of funding with methane abatement financing only representing less than 2% of total climate finance flows.

The presence of remote aerial and satellite monitoring of methane emissions holds fossil fuel companies and other major methane emission sources (e.g., landfills, livestock and agriculture) to account, providing an economical way for energy buyers and government regulators to keep track. Governments would be flying blind if the eyes in the sky weren't there. Numerous research studies have concluded that when asked to report their emissions, the energy sector typically under-report their methane emissions by 70%.

This summer there was a major setback after the Environmental Defense Fund (EDF) announced that it had lost contact with MethaneSAT. Launched in June 2024, the satellite circled the Earth 15 times a day while it’s instruments monitored even the smallest methane leaks. It's loss will make it much more difficult to track methane emissions, especially the largest offenders, the so-called super-emitters who emit vast plumes of methane that exceed 10,000 kg per hour.

But are governments as watchful as they might have been only a couple of years ago? In 2025 the Trump administration announced that the Waste Emissions Charge (part of the Inflation Reduction Act package of 2022) would now be delayed until 2034. Meanwhile, in New Zealand the government recently announced that it had downgraded its 2050 target, from a 24-47% reduction below 2017 levels, to just 14-24 %. And then in Europe, officials are under pressure to water down the EU Methane Regulation, the blocs first legislation specifically targeting methane emissions from the energy sector.

6. Carbon dioxide removal (CDR) is in a transition phase

Earlier in the year I highlighted how companies, beginning with Stripe, and then via groups of companies coming together, acted as a buyer of first resort, employing advanced market commitments to signal demand, in turn spurring innovation and the development of new CDR technologies. Tech companies and financial institutions especially have been motivated to play this role, betting that although CDR prices are high for them today, the price will be low for everybody tomorrow.

That model can only get so far. While the cost of removing CO2 is borne privately to whomever pays for it, the benefits accrue to society at large. The upshot is that there isn’t a natural market for CDR. Unless someone is willing to stump up the high costs, technology developers cannot be certain that there will be demand for their CDR service in the future.

Encouragingly, CDR showed the first hints of a transition in 2025; away from one largely funded by the largesse of the world's biggest tech companies, and towards a compliance based model relying on government policy. The UK emissions trading scheme could be the first regulated compliance carbon market to include CDR. In the summer, the UK government announced that engineered CDR projects (e.g. DACs and BECCS) taking place in the UK will be eligible to receive UK ETS allowances (UKAs) by the end of the decade. Meanwhile, an independent review commissioned by the government came out strongly in support of CDR playing a key role in meeting UK climate targets.

The move by governments into the space can't come soon enough if CDR is to reach the scale necessary to keep global warming on a long-term 2°C trajectory. Given that fossil fuel demand is likely to remain strong (especially from industries where emissions are hard to abate), CDR will become even more vital to help to negate a potential overshoot. Lots more needs to be consulted on and tested before the UK's CDR policy is eventually rolled out, but its an encouraging signal for where other governments should direct their efforts.

Finally, there are some indications that we're in the early stages of what may become the next trillion dollar market. Yes, there is no natural buyer for CDR. Yes, the veneer of altruism displayed by Microsoft et al. can only get us so far. Yes, there is 'no free lunch' with CDR technologies as all have potential side-effects. But overcome all those obstacles, and in a world where several hundred gigatonnes of CO2 need to be removed, CDR could easily be a trillion dollar business. It's no wonder that the largest oil and gas producers spot an opportunity.

What is on my radar for 2026?

Europe is likely to be the focus, at least during the first half of 2026.

To start with, the EU's Carbon Border Adjustment Mechanism (CBAM) comes into force on 1st January 2026. It has already served to incentivise Brazil, India, Turkey and several other countries into introducing their own carbon price – expect other governments to announce similar measures once they see CBAM in action. CBAM also promises to redraw global commodity flows, and while some will suffer (e.g. carbon intensive manufacturers based in locations without a carbon price), others (e.g. cement producers, commodity trading firms) will benefit from margin growth and volatility.

While other carbon markets experience political uncertainty and rapid rule changes, the EU ETS stands out as a beacon of strength. The EU's bureaucratic processes may be sclerotic, but that is a strength when it comes to engendering trust in carbon markets. Could there be a flight to quality in 2026? There's certainly an opportunity for carbon prices to move back towards the €100 per tonne CO2 level sometime early in 2026, at least based on the emerging allowance deficit.

If that does indeed materialise, expect policymakers to be even more vocal in talking down the market and floating ideas for containing costs. It's worth bearing in mind that until now EU policymakers have only been concerned with their domestic audiences perception of carbon prices. The launch of CBAM means that higher prices will reverberate across the globe, impacting on Europe's relationship with its main trading partners.

The IMO's carbon pricing mechanism never got the nod, but that doesn't mean there aren't any pricing signals in the maritime sector. Europe's FuelEU Maritime regulation came into force on 1st January 2025. The initiative is targeting a progressive reduction in the greenhouse gas (GHG) intensity of fuels used by ships: starting at 2% in 2025, increasing to 6% in 2030, and reaching 80% by 2050.

2026 marks the first year of compliance, and so by the end of January shipping companies must submit their first report covering their 2025 voyages. What is the cost of compliance? Well, one pooling company has started publishing a daily price. Today its €230 per tonne CO2e. A global agreement is always much more effective in keeping costs down, but in the absence of such a deal, FuelEU could still have a significant bearing on maritime decarbonisation.

The action elsewhere in 2026 could come from China and whether emissions will now start to decline. As noted in July on Carbon Risk, China’s ETS will now transition from an intensity-based carbon market, to one with an absolute cap on emissions. Industries with a stabilised emissions path will begin to adopt an absolute cap on emissions from 2027 with the market migration complete on a national basis by 2030. It's a clear signal that Chinese authorities believe the top is in, or at least very close by.

The Chinese carbon price fell by 15 yuan to almost 50 yuan in late October, marking a 40%+ decline during 2025. However, since November the price has rebounded to almost 70 yuan (€8.50 per tonne CO2) as the regulator tightened emission allocations. Be on the look out for continued robust reinforcement if China's emissions trading scheme is going to align with best practices in Europe.

Finally, the last (but by no means the only) thing I'm thinking out for 2026 is the impact of a collapse in AI investment, should it arrive. For example, power demand forecasts have been revised higher pretty much everywhere, but particularly North America as demand for data centres grows. Even if there is a slowdown that could take some heat out of demand for renewable energy (much quicker to install than fossil fuel plants or indeed nuclear). Furthermore, given Microsoft's outsized impact on the development of CDR, a retrenchment in investment by tech companies, or indeed a ratcheting down in expectations for power demand, could seriously slow investment in new CDR capacity.

Thanks once again for your support. If you like what you hear and want to join me on this journey check out the link below to subscribe to Carbon Risk.