FICC Market Review: Carbon Markets

Since the beginning of 2025, heightened volatility has been a recurring theme across various financial markets—a theme we’ve explored throughout our FICC Market Review series this week. We’ve addressed everything from the nuances of energy price risk and the shifting landscape of foreign exchange, to the expectations for interest rate cuts and the optimal timing for a bond deal. But it's not just the big picture—we also need to see how these larger market shifts are playing out in more specific areas. That's why we're zooming in on North American carbon markets, with a special focus on what's happening right here in Alberta.

Carbon Markets- Where did this all start?
A carbon market is a trading system in which carbon credits are bought and sold. Carbon credits (also called carbon offset credits, or offset credits) are the tradable market instruments, for the purpose of incentivizing a reduction in greenhouse gas (GHG) emissions. This system effectively turns a tonne of CO2 emissions into a commodity by assigning a price to it. It allows companies some flexibility in how to achieve their emission reduction targets, meet compliance obligations, and potentially turn their emissions requirements into a competitive business strategy by hedging or mitigating costs. The carbon credit price is set in combination by government policy and market dynamics.

The concept of pricing carbon to curb emissions gained international traction with the 1997 Kyoto Protocol, leading to the launch of the European Union Emissions Trading System (EU ETS) in 2005. Since then, driven by the Paris Agreement (2015) and global decarbonization targets, diverse mandatory carbon markets have emerged worldwide.

There are two different types of carbon markets. Carbon credits can be sold in carbon markets and used by others for regulatory compliance obligations (compliance markets) or to meet voluntary emission reduction objectives (voluntary markets). Today, our focus is on the dynamics of the compliance markets, particularly in light of recent market shifts.

North American Compliance Markets
In North America, there are three main types of compliance markets:

• Cap-and-trade: Governments set an emissions cap, and companies trade allowances to stay within it.
• Output-Based Pricing System (OBPS): The Canadian federal government and some provinces set decreasing carbon intensity (CI) limits for industrial facilities. Companies exceeding their targets earn credits.
• Low-carbon fuel standards (LCFS): Fuel suppliers must reduce the emissions intensity of transportation fuels over time or purchase credits.

The Western Climate Initiative (WCI) and Regional Greenhouse Gas Initiative (RGGI) cap-and-trade markets cover ~85% of North American compliance-based emissions, with WCI (covering California and Quebec) being the largest. 

Alberta TIER: Local Market Dynamics
The energy sector in Alberta is dancing to the tune of significant changes, primarily driven by recent carbon policies and regulatory changes. For business owners, navigating this complex and evolving landscape presents considerable challenges.

Alberta has a long history of carbon pricing, evolving from Specified Gas Emitters Regulation (SGER, 2007) to Carbon Competitiveness Incentive Regulation (CCIR, 2018), and finally to the Technology Innovation and Emissions Reduction (TIER) system in 2020, backed by the federal OBPS.

TIER sets emission intensity benchmarks for industrial facilities in Alberta. To meet their obligations, these facilities have a few options: they can reduce their actual emissions, submit offset or performance credits they've earned, or contribute to the TIER fund.

A big reason for TIER's design is that it's meant to be cost-efficient and specifically tailored to Alberta's industrial scene, especially our oil and gas sector. Unlike cap-and-trade, which sets a hard, economy-wide limit on total emissions, TIER focuses on emission intensity—that means emissions per unit of output. Facilities get a benchmark, and if they go over it, they pay for those extra emissions. This approach helps Alberta manage emissions while still keeping our key industries competitive. However, a key thing to remember is that because it focuses on intensity, it doesn't directly control the absolute amount of emissions, which also depends on how much industrial activity is happening overall.

"The only constant is change" aptly describes the dynamic nature of Alberta's carbon market, particularly in 2025, driven by ongoing price adjustments and further development to policy surrounding Alberta's TIER system. As of June, discussions are underway regarding potential upcoming policy shifts for TIER:

• TIER Opt-out: A proposal to allow small emitters (under 100,000 tonnes CO2e annually) to opt out of TIER.
• Direct Spend: Allowing companies to count direct investments in emissions reduction technology towards compliance, in addition to generating credits.

So far, only a discussion document has been circulated; nothing is final. We anticipate there will be more clarity on Alberta TIER's next steps in the coming weeks or months.

In May 2025, the Alberta government announced an indefinite freeze on the TIER carbon price at $95 per tonne of CO2e. This decision diverges from the previous plan to align with the federal carbon pricing benchmark (targeting $170 by 2030).

ATB's Carbon Trading Desk is active in the market for TIER credits and will be closely tracking the upcoming changes in Alberta's carbon landscape–we’re here to help clients get ready. Shall we dance?

This article was originally published in The Twenty-Four.