Understanding the CO₂ certificate market

In an era where climate change is one of humanity’s greatest challenges, CO₂ certificates have emerged as a key instrument in the global fight against global warming. But what exactly are CO₂ certificates, how do they work, and why are they so important both for climate protection and as an investment opportunity?

What are CO₂ certificates?

CO₂ certificates, also known as emission certificates or carbon credits, are tradable permits that represent the right to emit a certain amount of greenhouse gases—usually one tonne of carbon dioxide (CO₂) or the equivalent of other greenhouse gases. These certificates fulfil two main functions:

Environmental instrument

They create financial incentives to reduce greenhouse-gas emissions and to support projects that remove or sequester CO₂ from the atmosphere.

Financial instrument

They constitute tradable assets whose value is determined by supply and demand on specialised markets, thereby creating an economic mechanism to combat climate change.

The underlying principle of CO₂ certificates is based on the concept that climate change is a global problem, so it does not matter where in the world emissions are reduced or offset—what matters is only that the overall amount of greenhouse gases in the atmosphere decreases.

The emergence of CO₂ certificates

CO₂ certificates are generated through various processes, with the main sources being reforestation and forest-protection projects, renewable-energy projects, and methane-capture projects. The process involves several steps:

CO₂ sequestration through photosynthesis

In reforestation and forest-protection projects, trees and plants absorb CO₂ from the atmosphere as they grow via the natural process of photosynthesis. The carbon is stored in biomass (trunk, branches, leaves, roots) and in the soil.

Scientific measurement

The amount of CO₂ captured or avoided is measured and quantified using scientific methods. These include field measurements, satellite imagery, computer modelling, and other advanced techniques.

Independent verification

Independent third parties—specialised auditing organisations—verify the actual CO₂-sequestration performance according to internationally recognised standards such as the Verified Carbon Standard (VCS), Gold Standard, or Climate, Community & Biodiversity Standards (CCB).

Certification and registration

After successful verification, official CO₂ certificates are issued and recorded in specialised registries to prevent double counting and ensure system integrity.

Trading

These certificates then enter the market, where they can be purchased by companies, governments, or individuals to offset their own emissions.

The different types of CO₂ markets

The market for CO₂ certificates can be divided into two main segments:

The compliance market (mandatory market)

The compliance market is based on statutory regulations and obliges certain companies and sectors to reduce their emissions. The most significant compliance market is the EU Emissions Trading System (EU ETS), the largest emissions-trading system in the world.

Characteristics of the EU ETS:

Covers about 40 % of greenhouse-gas emissions in the EU.
Includes more than 11,000 energy-intensive installations as well as airlines.
Operates on a cap-and-trade principle: there is an overall cap on total emissions that is reduced each year.
Companies must hold a corresponding certificate for every tonne of CO₂ they emit.
Prices for EU Allowances (EUAs) have risen from under $10 per tonne in 2018 to over $80 in 2023.
Experts forecast a further increase to $100–120 by 2030 Alongside the EU ETS, there are additional regional and national compliance markets, including: - The Western Climate Initiative (WCI) in North America.
The Regional Greenhouse Gas Initiative (RGGI) in the northeastern USA.
National emissions trading systems in the United Kingdom, South Korea, New Zealand, China and other countries.

The voluntary market (Voluntary Market)

The voluntary market enables companies, organisations and private individuals to offset their emissions voluntarily, without being legally obliged to do so. This market has experienced impressive growth in recent years.

Characteristics of the voluntary market:

Growing demand from companies pursuing carbon-neutrality goals.
A variety of project types, including reforestation, forest protection, renewable energy and energy efficiency.
Prices ranging from 10 to 70 euros per tonne of CO₂, depending on project type, quality and added benefits - Significant quality differences between various certificates.
Increasing standardisation and quality requirements.

The enormous growth potential of the CO₂ market

The market for CO₂ certificates is in a phase of unprecedented growth, driven by stricter climate targets, growing environmental awareness and the rising importance of ESG criteria (Environmental, Social, Governance) for investors and consumers.

Market growth forecasts

Current analyses by leading research institutes paint an impressive picture of the expected market development:

Exponential volume growth: From about 669 million US dollars in 2024, the market is projected to exceed 16 trillion US dollars by 2034 – an increase of more than 24,000-fold.
Projected price increases: Experts such as the EY Net Zero Centre forecast a rise in CO₂ prices from an average of 75 euros per tonne today to 150-200 euros by 2035, with six-fold growth by 2031.
Rising demand: In 2023 alone, more than 1,500 large companies worldwide committed to carbon neutrality. These companies will need significant amounts of CO₂ certificates in the coming years to offset their unavoidable residual emissions.
Supply constraints: At the same time, the supply of high-quality CO₂ certificates is limited by increasing quality requirements and the restricted availability of suitable project areas, which is likely to drive further price increases.

Das enorme Wachstumspotenzial des CO2-Marktes. Marktwachstumsprognosen

Das enorme Wachstumspotenzial des CO2-Marktes. Treiber des Marktwachstums

Drivers of market growth

Several fundamental trends are driving the growth of the CO₂ market:

Regulatory developments: The tightening of climate targets at global and national levels, such as the EU “Fit for 55” climate package, is creating rising demand for CO₂ certificates in regulated markets.
Voluntary corporate commitments: An increasing number of companies are committing to net-zero emission targets and need CO₂ certificates to offset their unavoidable residual emissions.
Consumer demand: Consumers are increasingly favouring climate-neutral products and services, prompting companies to invest in CO₂ compensation.
Investor preferences: ESG criteria are becoming more important in investment decisions, motivating companies to improve their CO₂ balance.
Technological innovations: New technologies such as blockchain enhance the transparency, efficiency and accessibility of the CO₂ market.

The regulatory framework: the EU Climate Law and its significance

The European Union has created a groundbreaking regulatory framework with the European Climate Law, making the EU’s climate targets legally binding and thus having significant impacts on the CO₂ market.

The European Climate Law

The European Climate Law, which entered into force in June 2021, sets out two ambitious goals:

Climate neutrality by 2050: The entire EU economy and society must be climate-neutral by 2050, meaning that no more greenhouse gases may be emitted than can be absorbed by natural or technological sinks.
Interim target for 2030: Reduce net greenhouse-gas emissions by at least 55 % by 2030 compared with 1990.

These legally binding goals mark a paradigm shift: climate protection is no longer optional but a legal obligation. To achieve these targets, the EU has introduced the “Fit for 55” climate package, which includes numerous measures, among them a fundamental reform of the EU Emissions Trading System.

The EU Emissions Trading System (EU ETS)

The EU ETS is the cornerstone of EU climate policy and the largest CO₂ market in the world:

Cap-and-trade principle: There is an overall cap on total emissions that is reduced each year. Companies must hold an EU Allowance (EUA) for every tonne of CO₂ they emit. These allowances can be traded.
Affected sectors: The system currently covers energy-intensive industrial installations, power generators and airlines operating within the European Economic Area.
Expansion under “Fit for 55”: The system will be extended to additional sectors such as buildings, road transport and shipping, which will further increase demand for emission allowances.
Reduction of free allocations: The previous practice of granting certain sectors free emission allowances will be phased out, leading to additional scarcity and price increases.
Carbon Border Adjustment Mechanism (CBAM): This new mechanism will impose a levy on imports from countries without comparable carbon pricing to avoid competitive distortions and prevent “carbon leakage”.

Impacts on companies

The regulatory developments have far-reaching implications for businesses in the EU:

Rising costs for emissions: As carbon prices increase, emissions become an ever more significant cost factor, requiring active management.
Competitive disadvantage for emissions-intensive products: Products with a high carbon footprint become increasingly expensive compared with climate-friendly alternatives and thus less competitive.
Innovation pressure: Companies face growing pressure to invest in low-emission technologies and processes to maintain their competitiveness.
Reporting obligations: Requirements for transparency and reporting on greenhouse-gas emissions are continuously increasing.
Strategic importance of carbon management: Managing carbon emissions and certificates is becoming a central element of corporate strategy.

These regulatory frameworks create a solid foundation for the long-term appreciation of carbon certificates and underscore their strategic importance both as an instrument for emissions offsetting and as an investment opportunity.