While compliance carbon markets are expanding worldwide, they remain hampered by weak liquidity and poor transparency that undermine their effectiveness as a financial tool, the CFA Institute said in a report on Friday.

“Carbon is emerging as a distinct asset class, reshaping both compliance costs for companies and investment strategies for funds,” said Yushuo Yang, lead author of the study. “But weak spot market liquidity and opaque data remain significant barriers to market maturity.”

Expanding but Uneven Coverage

Carbon trading systems, also known as emissions trading systems, have become a central plank in global climate policy.

As of 2024, 36 ETS programs were active worldwide, covering 18 percent of greenhouse gas emissions, equal to 9.9 billion tonnes of carbon dioxide equivalent.

About one-third of the world’s population lives in jurisdictions that enforce such schemes, representing 58 percent of global gross domestic product.

The European Union ETS remains the world’s largest and most liquid market. China’s National ETS, launched in 2021, is rapidly developing, with allowance prices stabilizing at about $13 per tonne in 2024, though trading volumes remain volatile.

Other systems operate in North America, South Korea, New Zealand and parts of Canada.

Investors Take the Lead

Institutional investors, including banks and funds, have become the dominant players in carbon trading.

In the EU market, they accounted for 56 percent of total transaction volume in 2023, worth €408 billion ($448.08 billion), according to the European Securities and Markets Authority.

Covered emitters — the companies legally obliged to surrender allowances — represented just 7 percent of auction participants.

“Financial intermediaries are shaping carbon markets by providing liquidity and absorbing much of the compliance demand,” Yang said. “This means companies increasingly rely on banks and brokers rather than auctions to secure their allowances.”

Retail investors have few direct entry points, as most ETS platforms impose high minimum trading thresholds and complex registration requirements.

But exchange-traded funds are providing indirect access. KraneShares’ Global Carbon Strategy ETF, which tracks futures contracts from major systems including the EU and California, held $160 million in assets by July 2025.

Liquidity Split Between Spot and Derivatives

Liquidity varies widely between instruments. The spot market for EU allowances averaged €72 between 2021 and early 2025, with price volatility of 18 percent and bid-ask spreads averaging €2.90. That combination suggests unstable pricing and high transaction costs.

By contrast, derivative markets show stronger participation, particularly in short-dated contracts. Open interest in Intercontinental Exchange European Union Allowance December 2025 futures tripled over the year, signaling sustained demand.

But long-term contracts, such as those maturing in 2028, attracted little activity, reflecting policy uncertainty and companies’ reluctance to hedge far into the future.

China’s spot market offers more price stability, with carbon allowances trading in a narrow band around $13 per tonne, but trading volumes are erratic. Seasonal spikes, especially at year-end compliance deadlines, highlight the market’s thin liquidity.

Transparency Gap

The report flagged transparency as another persistent weakness. Order book disclosure differs significantly between exchanges, and over-the-counter trades remain largely invisible. Investors often need paid platforms for access to detailed data.

“Greater transparency is vital for price discovery and investor confidence,” Yang said. “Without it, carbon markets risk falling short of their potential as a cornerstone of climate finance.”

The CFA Institute said reforms aimed at harmonizing disclosure standards, expanding derivatives and lowering entry barriers for retail investors could strengthen market efficiency.

“Liquidity and transparency will determine whether carbon truly evolves into a mainstream asset class,” Yang said. “We’re at a turning point.”

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