The paper traces the rapid expansion of compliance markets, now covering more than a quarter of global emissions, and explores how these mechanisms could influence capital market activity, particularly in trading, hedging, and structured finance. It also clarifies the more limited, but potentially complementary, role of voluntary carbon markets in transition strategies and in innovative sustainable bond issuance.

Key insights:

• Compliance markets dominate in scale and liquidity. Traded value in regulated allowance systems reached about USD 950 billion in 2024, with the EU ETS leading global activity.

• Growth in voluntary markets and carbon offsets will remain dependent on the evolution of aviation generated demand through CORSIA, as well as further progress on integrity and recognition.

• Offsets have a narrowly defined role in transition finance. Guidance, including ICMA’s Climate Transition Finance Handbook, limits offsets to residual emissions, but new structures such as World Bank outcome bonds show how they can contribute to innovation in sustainable bonds.

• Compliance markets and their international expansion fueled notably by the EU’s CBAM represent the real opportunity centered on risk management and derivatives trading of carbon allowances.