22 Jul 2025 Carbon Markets in Flux: What Happens When Politics Interfere?

Posted at 19:27h in Climate change, Emission Trading Scheme by

Between 2024 and 2025, carbon markets have been shaped as much by politics as by policy. Major global economies, namely the EU, UK, and US, have taken divergent paths in the governance, ambition, and international positioning of their climate mechanisms. The UK’s post-Brexit isolationist approach has revealed the limitations of delinking from the EU ETS, while the United States faces fresh volatility under the second Trump administration’s protectionist agenda. Meanwhile, the EU is pursuing a new phase of carbon market diplomacy, seeking to influence global carbon pricing through CBAM and technical partnerships, even as it faces domestic political headwinds slowing down some internal climate reforms.

  1. UK Carbon Pricing Breakdown and Policy Rebound

In the wake of Brexit, the UK launched its own carbon market in 2021, the UK Emissions Trading Scheme (UK ETS), but the system soon diverged sharply from its EU counterpart. Between 2022 and 2024, UK carbon allowance prices averaged only £38/t, compared to €80–100/t in the EU ETS, due to weak floor pricing, allowance oversupply, and diminished investor confidence.

Figure 1. SVI analysis based on data from IEEFA (2024), Reuters (2025), and Trading Economics (2021–2025)

According to the Institute for Energy Economics and Financial Analysis (IEEFA), this resulted in a £29 billion loss in potential auction revenue compared to if the UK had mirrored EU pricing levels.

This pricing weakness not only undermined investment incentives but also created uncertainty among market participants. In May 2025, however, carbon prices in the UK rebounded to £60/t following the announcement of exploratory talks to re-link with the EU ETS. As reported by Reuters (2025), market confidence surged amid speculation that integration would restore price alignment, liquidity, and investor certainty. The UK experience demonstrates that ETS market isolation post-Brexit weakened price performance, but policy coordination with the EU is restoring credibility and economic opportunity.

  1. US Climate Policy under the Second Trump Administration

While the Inflation Reduction Act (IRA) remains in effect, the second Trump administration announced on January 20, 2025, its intention to withdraw the United States from the Paris Agreement for the second time[1], reinforcing a policy shift pursuing trade and regulatory policies that indirectly obstruct clean energy expansion and climate cooperation. See below, the main provisions taken by the Trump administration and the major outcome on US Climate Policy:

  • July 7, 2025 – New Tariffs Announced: President Trump reintroduced wide-ranging import tariffs under the International Emergency Economic Powers Act (IEEPA). These included duties of up to 70% on clean energy components such as solar panels, batteries, and wind turbines, primarily imported from China, Japan, and South Korea.
  • Impact on Clean Energy Supply Chains: According to TIME (2025), these tariffs are expected to raise costs for domestic clean energy developers, slow project timelines, and reduce emissions savings. The higher input costs risk making clean energy less competitive compared to fossil fuels, particularly in states that lack strong subsidies or decarbonization mandates. Project financiers have expressed caution about allocating capital under regulatory uncertainty, leading to delayed utility-scale solar and battery storage developments in multiple western states.
  • Volatility in State-Level Carbon Markets: The administration also challenged state-led initiatives (e.g., California’s Cap-and-Trade Program, RGGI in the Northeast), injecting legal uncertainty into their future viability. As reported by Politico (2025), auctions in these programs experienced irregular participation and price fluctuations in response to federal intervention. This intervention has created legal ambiguity about the federal government’s tolerance of subnational climate markets. In RGGI, permit prices fell by 12% between late 2024 and early 2025, reflecting investor concern. In California, prices plateaued despite growing emissions from the power sector, indicating regulatory pushback had weakened market signals.

These trends suggest that legal ambiguity at the federal level is distorting market expectations, particularly in auctions, and is undermining capital allocation decisions by compliance entities.

  1. Carbon Price Evolution across Major Markets (2019–2025)

The following table illustrates the carbon price trajectories in major markets over recent years, converted into euros for consistency[2].

Table 1. SVI analysis based on data from Trading Economics, IEEFA, Reuters, CARB, SEEE, KRX, and ICAP reports.

Figure 2. Carbon price trends across markets, 2019-2025. SVI re-elaboration from same data sources.

  1. Observations on Price Dynamics:
  • EU ETS peaked in 2023, then dropped due to economic uncertainty and oversupply; however, remains structurally robust.
  • UK ETS fell post-Brexit but rebounded sharply in 2025 as EU linkage talks resumed, signaling policy credibility matters.
  • California CCA has shown gradual growth, driven more by fixed auction floor prices than speculative trading.
  • China ETS remains low-priced due to free allocation and limited sectoral coverage, but is slowly stabilizing.
  • Korea KAU has demonstrated steady growth and is now the highest-priced Asian market, supported by auction reforms.

Figure 3. Carbon price evolution by country. SVI analysis from Trading Economics, IEEFA, Reuters, CARB, SEEE, KRX, and ICAP reports

For further information, please consult the following sources:

[2] Conversion rates used are based on average 2025 exchange rates:

  • £1 = €1.15
  • US$1 = €0.93
  • ¥1 = €0.012
  • ₩1,000 = €0.68

[1]The United States joined the Paris Agreement in 2016 under the Obama administration. In June 2017, President Trump announced the first withdrawal, which became official in November 2020. President Biden reversed this decision in early 2021, re-entering the Agreement. On January 20, 2025, the second Trump administration announced a renewed intent to exit, triggering the same formal one-year withdrawal timeline under the UNFCCC rules.

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