Emission Rights: How it Works and What is at Stake for Investors and the Environment

Emissions trading markets have become a key mechanism for reducing greenhouse gas emissions in Europe and worldwide. These mechanisms are transforming corporate strategy while opening new perspectives for investors.

Emission Rights: What Are They?

Definition of Emission Rights Markets (or Carbon Markets)

Emission rights markets are a system implemented by the European Union and several states worldwide to encourage companies to reduce their emissions.

Technically, it's called an Emissions Trading System (ETS). While the media has popularized the term "pollution rights," this term can be misleading. ETS are characterized by quotas available in capped and decreasing quantities, meaning there are fewer and fewer carbon quotas available over time. Therefore, it's not a right that companies can buy to escape environmental constraints. Instead, it's the consumption of a common and decreasing budget, the cost of which progressively increases as the cap lowers.

It's a financial instrument, continuously traded on energy markets—like gas, oil, or electricity—whose price varies according to supply and demand. It directly determines the cost of emissions for companies. The higher the price, the more incentivized obligated companies are to decarbonize.

‍

‍

Emission Rights, Polluter-Pays, Carbon Quotas, Carbon Tax: What's the Difference?

The emission rights market is also called the carbon market, carbon quota market, or emissions quota market.

This multiplicity of terms is often a source of confusion, as emission quotas have nothing to do with carbon credits:

• Emission quotas aim to put a price on greenhouse gas emissions: it's a pricing mechanism.
• Conversely, carbon credits generate flows towards greenhouse gas capture or avoidance projects: they are offsetting mechanisms.

"Carbon quotas" were established in the late 1990s as part of the Kyoto Protocol, the first international agreement in which 192 countries agreed to reduce greenhouse gas emissions.

"Carbon quotas" thus correspond to "emission rights." One carbon quota is equivalent to one tonne of CO2 or CO2 equivalent (CO2eq). Concretely, when a company emits one tonne of CO2, it is obliged to surrender a quota to the jurisdiction that implemented the market. In Europe, this is managed directly by the European Commission.

This system embodies the polluter-pays principle: the more greenhouse gases a company emits, the more it pays. The objective is to re-internalize the negative externalities generated by polluting activities.

Carbon quotas also differ from the carbon tax. This tax penalizes greenhouse gas emissions. By imposing a financial cost corresponding to each unit of CO2 emitted, it seeks to encourage companies and individuals to reduce their carbon footprint. It is simpler to understand and implement than a dynamic pricing system that depends on market mechanisms, but it is less effective at reducing emissions.

How Does the Emission Rights Market Work in 2025?

The Carbon Market in Europe

The European Union was a pioneer in the field of emission rights markets. The EU established a greenhouse gas emission allowance trading system as early as 2005, following the ratification of the Kyoto Protocol. The ETS (Emissions Trading System) is one of the European Union's main levers for reducing corporate greenhouse gas emissions.

Upon its creation, the EU ETS became the world's largest carbon market. It brings together 30 countries—the 27 member states plus Iceland, Liechtenstein, and Norway. It is also linked to the Swiss ETS. It covers emissions from the energy, industry, and aviation sectors—nearly 40% of the EU's total GHG emissions.

This mechanism is governed by European regulatory texts, regularly updated to strengthen its effectiveness. The EU ETS has gone through 4 successive phases:

• Phase 1 (2005-2007): This was a discovery phase. Most allowances were allocated for free.
• Phase 2 (2008-2012): The use of carbon credits from the international voluntary market was permitted for compliance purposes. Carbon prices were low, notably due to the economic crisis and high volumes of carbon credit supply.
• Phase 3 (2013-2020): Significant reforms were adopted to address imbalances between supply and demand.
• Phase 4 (2021-2030): The quota cap is decreasing at an accelerated pace. The ETS covers more sectors to maximize its impact.

‍

Carbon Markets Worldwide

In 2021, China launched its carbon market. Inspired by the European model, this market is expected to cover 40% of the country's GHG emissions. As China accounts for over 30% of global emissions, the Chinese ETS will quickly become the world's largest carbon market. This tool is part of China's decarbonization strategy, with a goal of carbon neutrality by 2060.

Other countries have implemented their markets: the United Kingdom, New Zealand, South Korea, and more. In North America, a dozen Canadian provinces and American states have teamed up to establish a common cross-border market: the Western Climate Initiative.

Worldwide, over 36 carbon markets are in place, and about twenty more are under consideration.

‍

‍

Limits, Opportunities, and Future of Carbon Markets

Environmental Challenges and Limits of Carbon Markets

The carbon market is a powerful lever for reducing GHG emissions with a simple principle: the more expensive the carbon quota, the more companies have to pay to pollute.

The EU ETS has helped reduce emissions from covered sectors by 50% since 2005. This reduction is expected to reach -62% by 2030. This reduction is driven by the energy sector, with the development of renewable and nuclear energies and the decline of fossil fuels.

Despite these advances, several criticisms and limitations are regularly raised.

The price of one tonne of CO2 (or equivalent) is still low compared to IPCC recommendations ($100, or about €90). Furthermore, it is not uniform across the world. On the European market, the price per tonne has increased significantly since 2005: it sells for around €70 in 2025. But prices are around €10 in China.

Another limit of carbon markets is "carbon leakage", which is the relocation of pollution to less regulated or more competitive areas. According to academics, for every 10 tonnes of carbon avoided in one area, CO2 emissions increase by 0.5 to 3 tonnes in the rest of the world.

What are the Developments in Europe and Worldwide?

Facing these limitations, the European Union has accelerated its ambitious policy. Phase 4 of the EU ETS corresponds to an accelerated reduction of quota caps and an expansion of its scope, particularly for aviation.

Furthermore, the EU implemented the Carbon Border Adjustment Mechanism (CBAM) starting in 2023. The objective is to address carbon leakage issues by ensuring that imported products are subject to carbon pricing similar to those produced within the EU. Europe thus seeks to encourage other countries to align with its climate objectives.

The Chinese market is also developing. While it focused exclusively on the electricity sector since its launch, it is expected to expand to three critical industries in 2025: steel, cement, and aluminum.

These regulatory and geographical developments are redefining opportunities for economic actors.

Why Are Carbon Markets Interesting for Businesses and Investors in 2025?

Beyond their environmental benefits, carbon markets have proven their worth for businesses. The gradual reduction in the number of quotas allows affected companies to decarbonize at a pace consistent with European climate objectives. They can also leverage their decarbonization efforts and sell their excess quotas. This is a competitive advantage that is fully integrated into their CSR strategy.

But carbon markets are also an opportunity for investors. This new asset class allows for portfolio diversification, combining performance and impact.

Homaio enables individuals to directly contribute to accelerating emission reduction efforts in the EU ETS. These investors become actors in the transition to a low-carbon economy. Investing through Homaio is not just about the prospect of financial returns; it has a direct impact by accelerating emission reductions within the EU.

Conclusion

Key Takeaways

Emission rights markets are now an essential mechanism of the ecological transition:

• Carbon markets impose an emissions cap and encourage companies to reduce their environmental impact.
• Since 2005, the European market (EU ETS) has reduced emissions from covered sectors by 50%.
• Despite their effectiveness, these markets face criticism (price, carbon leakage...).
• Recent reforms are strengthening their impact: expansion to new sectors, implementation of CBAM...
• Carbon markets are a powerful lever for investing in the transition, with measurable economic and environmental impact.

To Go Further

To deepen your understanding of carbon markets, we recommend these reference resources:

• This article from the “Toute l'Europe” website
• This presentation from the French Ministry of Ecological Transition
• This guide by the European Commission

‍