The EU ETS is the huge market where the right to emit carbon dioxide is traded. It handles €260 billion a year in transactions. Companies and major investors like banks all take part, and retail investors can access it too. Here’s how it works
They’re called carbon credits, financial instruments traded on the carbon market. The EU treats them as a tool for pushing decarbonization forward, but Confindustria president Emanuele Orsini argues the instrument has morphed into a vehicle for financial speculation, with CO2 turned into a commodity traded much like oil. So how does this market actually work? Who can trade in it, and how is money made?
The carbon market is a financial market that allows certificates representing one tonne of carbon dioxide, or equivalent greenhouse gas, avoided, reduced or removed from the atmosphere, to be bought and sold. These certificates attest to the capture or non-emission of a tonne of CO2 and can be acquired by companies, organizations or institutions. Carbon credits are issued by independent certification bodies that verify emissions-reduction or removal projects. Two distinct types of carbon market exist: the EU ETS (Emissions Trading System), a large, regulated market that serves as the EU’s reference system, and the Voluntary Carbon Market, a much smaller, unregulated market for carbon credits.
The EU ETS market
The EU ETS is Europe’s system for putting a price on CO2 emissions, built on a cap-and-trade principle. Brussels sets an overall emissions ceiling, and for every tonne of CO2-equivalent emitted, a company must surrender one EUA (European Union Allowance), a tradeable unit permitting the emission of one tonne of CO2-equivalent. Most EUAs are sold at auction, though a portion is still allocated free of charge, mainly to industries most exposed to international competition, such as steel, cement, aluminium, chemicals, fertilizers, paper and other energy-intensive sectors. It is a highly liquid market, moving large sums of money: since its launch in 2005, CO2 quota auctions have generated more than €260 billion. Like any market, the price of what’s traded shifts constantly with supply and demand; rising corporate demand tied to ever-tighter decarbonization targets can push prices higher. Spot quotas currently trade above €84 a tonne, near the upper end of the range seen over the past three years, though still below the all-time high of €105.73 reached in February 2023. Futures contracts expiring in December 2026 are trading around €83.53.
Buyers and sellers in this market include companies subject to ETS obligations (energy, heavy industry, transport), which buy allowances to comply with environmental rules and can resell them if they cut emissions below their EU-mandated target; companies with voluntary sustainability goals (tech, retail, fashion, transport); governments meeting climate commitments tied to targets like the Paris Agreement; and financial investors, who see carbon credits as a profit opportunity, betting the market will grow as environmental regulation tightens. Gian Marco Salcioli, a strategist at Assiom Forex, explains that the European emissions market started essentially as a compliance market, since companies in sectors covered by the EU ETS must surrender one EUA for every tonne of CO2-equivalent emitted. Over time, though, a genuine financial market for carbon has grown up around that regulatory requirement, one where industrial firms and utilities operate alongside banks, investment firms, funds and other investors. That financial dimension becomes even clearer looking at the market’s structure: in 2024, roughly 13.7 billion tonnes of CO2-equivalent changed hands across about 4.7 million transactions, with volumes up roughly 35% from the year before. Futures accounted for around three-quarters of total volume, confirming that the EUA market is now deeply integrated with broader financial and derivatives markets.
Growing market
The market keeps expanding in volume as more sectors come under emissions-reduction obligations with the 2050 net-zero deadline approaching. Salcioli notes that the market has reached considerable scale: according to ESMA, total trading value on Europe’s carbon market hit roughly €777 billion in 2025, with investment firms and credit institutions accounting for about 62% of volumes traded. He cautions against reading that 62% figure simply as “speculation,” though, since a substantial share of financial institutions’ activity involves market-making, intermediation, risk management and hedging carried out on behalf of companies.
Speculation
Speculation in the carbon market works the same way it does in any financial market: buying and selling purely to profit from price swings, buying at one level in hopes prices will rise so the position can be sold at a profit. Here, what’s being bought and sold is emissions allowances. Salcioli confirms there is a genuine speculative component: a fund, trader or other financial investor can buy EUA futures simply because they expect the price of CO2 to rise, with no industrial emissions of their own to offset, for instance betting that tighter European climate targets will progressively shrink allowance supply and push prices up, or taking a bearish position on expectations of recession, lower industrial output or weaker demand for EUAs. Even so, he suggests caution about describing the market as speculation-dominated: in 2024, ESMA recorded an average of 909 entities holding daily positions in EUA derivatives, of which 453 were investment funds. Despite their numbers, investment funds accounted for only about 6% of positions, while investment firms and credit institutions together accounted for roughly 51%. Financial-sector presence is therefore substantial, he says, but is largely attributable to intermediaries also performing essential liquidity and risk-transfer functions. Asked directly whether this amounts to real speculation, Salcioli notes that ESMA hasn’t found evidence that financial operators are systematically distorting the market or undermining its integrity. In essence, EUAs have gradually evolved from a simple regulatory compliance tool into a genuine financial asset class, one where industrial demand, hedging, bank intermediation, trading and investment all coexist.
If a company under the ETS decarbonizes outside the EU, does it earn the same right to emit? Salcioli explains that under current EU ETS compliance rules for 2021-2030 (Phase 4), a company cannot offset its own plant’s emissions by financing or purchasing CO2 reductions generated by a project abroad; the European Commission has explicitly stated that, from Phase 4 onward, international credits can no longer be used for EU ETS compliance. Take an example: an Italian steel plant emits 100,000 tonnes of CO2 and must surrender 100,000 EUAs net of any free allowances. If that same company funds a project in Africa cutting 30,000 tonnes of CO2, those tonnes do not let it surrender only 70,000 EUAs; the Italian plant’s ETS obligation remains tied strictly to its own verified emissions. This differs from the past: in earlier ETS phases, companies could use, within certain limits, international credits from the Kyoto mechanisms, such as CERs (Certified Emission Reductions) and ERUs. Per the Commission, roughly 1.54 billion international credits, over 96% of the estimated maximum available, were used or traded before that earlier system ended. Since 2021, that option has been eliminated. That said, a company can still decarbonize abroad; what matters is what it actually gets from doing so. A foreign project can carry two kinds of value: it can count toward a group’s climate targets and sustainability reporting, depending on the accounting rules and claims used, or, if it meets a carbon-crediting program’s requirements, it can generate tradeable carbon credits on the voluntary market, and in some cases usable in other compliance schemes. But carbon credits and EUAs remain separate instruments that don’t connect: if an Italian group owns a factory in India and invests to cut its emissions, that reduction can matter for the group’s climate strategy, and might generate carbon credits if the project meets a given standard’s rules, but those credits don’t become EUAs and normally cannot be used to cancel the Italian plant’s EU ETS obligation.
Foreign projects
Is the EU considering opening up to foreign decarbonization activity? Salcioli says yes, and points to an important 2026 development: Brussels has built into its new climate framework the option of using high-quality international credits under Article 6 of the Paris Agreement in future. EU Regulation 2026/667 provides that, for the EU’s 2040 climate target, international high-quality credits could contribute up to 5% of the EU’s 1990 net emissions starting in 2036. The target remains highly ambitious, since this still corresponds to an 85% net domestic emissions cut versus 1990. More notably still, the regulation mentions a possible pilot period from 2031 to 2035 to help develop an international market for high-integrity credits. But there’s a crucial caveat: this doesn’t yet mean that from 2036 any foreign carbon credit could be converted into an EUA or used directly by an individual company for its own ETS compliance. The regulation addresses international credits’ contribution to the EU’s overall climate target; the origin, quality criteria and usage rules for such credits will need to be set out in subsequent EU legislation. The EU is genuinely opening the door to using high-quality international emissions reductions, Salcioli says, but it has not created any general convertibility.
The voluntary carbon market
Then there’s the Voluntary Carbon Market, relatively small in value but with significant growth potential. Salcioli notes that roughly 294 million carbon credits were issued in 2025, equivalent to 294 million tonnes of CO2e, while about 202 million credits were retired, meaning actually used and cancelled. The primary market’s value held around $1.4 billion, broadly stable for a fourth consecutive year. Overall, more than 2.6 billion credits have been issued since the Paris Agreement was signed, across more than 10,200 registered projects tracked in the main registries monitored by MSCI. Market growth hasn’t been linear, though: after strong expansion peaking around 2021, doubts emerged over the quality of some projects and their actual ability to generate additional emissions reductions, contributing to a pullback, with voluntary transaction volumes falling 25% in 2024 to their lowest level since 2018, even as underlying demand stayed relatively stable. A substantial supply overhang has also built up: almost a billion credits remained unretired at the end of 2024, pointing to a significant surplus relative to current demand. Still, the market appears to be going through a transformation rather than simply shrinking. Investors are increasingly favoring higher-quality credits, paying closer attention to additionality, permanence, avoidance of double counting, robust monitoring, reporting and verification systems, and overall environmental integrity and transparency. Carbon removals in particular are gaining ground: they still made up only about 10% of retired credits in 2025, but in 2024 they traded at an average premium of 381% over traditional emission-reduction credits. Growth prospects, then, lie mainly in value and quality. MSCI estimates the carbon credit market could grow from today’s $1.4 billion to $5-20 billion by 2030, and to $60-270 billion by 2050. Investment flows point the same way: capital committed to new projects and offtake agreements for future carbon-credit production reached about $22 billion in 2025, up 72% from 2024 and more than five times 2021 levels. The outlook, then, isn’t simply more credits, but a more selective, financially sophisticated market taking shape.
Retail investors
Can small investors get access too? Salcioli confirms retail investors do have access. An individual doesn’t need to enter the EU ETS system directly or own an industrial plant; they can get financial exposure to the carbon price through exchange-traded commodities and products listed on stock exchanges, including products that track EUA futures. This lets a retail investor take an indirect position on the direction of Europe’s CO2 price.
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