Carbon's Open Outcry Moment: Why Compliance and Voluntary Carbon Markets Must Grow Up Together

When I started out in markets, price discovery was a contact sport. Traders in garish-coloured jackets stood in a pit, screaming and throwing hand signals at one another, and somehow, out of all that noise, a price emerged. It worked, more or less. It was also opaque, error-prone, and impossible to scale to the size, efficiency and reliability that electronic markets operate at today. Fast forward a few decades and the same equity that once changed hands amid all that shouting now trades on electronic order books in microseconds, with deep liquidity, an audit trail for every fill, and a level of transparency the pit at that time could never have dreamed of. Markets, it turns out, don't begin efficient. They get there.

I raise this because carbon markets today look an awful lot like equities did before all that electronification. Except that there are two separate frameworks – compliance and voluntary markets – and they both need to undergo a similar journey to achieve true scale.

Two markets, one problem

The first is the compliance market – cap-and-trade schemes such as the EU and UK Emissions Trading Systems, where regulated emitters must hold an allowance for every tonne of carbon they put into the atmosphere, and where the cap ratchets down over time. These work reasonably well within their remit. Put a price on emissions, make it mandatory, and behaviour changes.

The second is the voluntary carbon market, or VCM – where companies choose to buy credits beyond anything regulation requires of them because it is the right thing to do. This is the market that funds the things the compliance schemes don't reach: afforestation, reforestation, biochar, direct air capture, and the other carbon removal approaches that we need, whether we like it or not.

And here is the uncomfortable truth: you cannot cap your way to net zero. Even a fully decarbonised economy will still have residual emissions, such as the hard-to-abate activities in aviation, cement and agriculture, that have to be physically removed from the atmosphere. Compliance markets price the emitting. Voluntary markets finance the removing. Both are needed to ensure that the planet we hand to our children has net emissions that are truly at zero.

Not shying away from the mess

That said, none of this excuses the VCM from the scepticism it has earned. There have been phantom credits, mis-sold projects, over-crediting, double-counting, and credits issued for reductions that would have happened anyway. When people started pulling on these threads and found that some credits represented little or no real-world reduction, the whole market took a well-deserved beating. Trust, once torched, can take years and be ruinously expensive to rebuild.

Part of the trouble is fragmentation. There is a cartoon that every engineer knows: a world groaning under multiple competing standards; someone announces that what the world needs is one universal standard to cover everyone's use cases, which results (inevitably!) in another competing standard. The carbon market has lived that joke in real life. Attempts to harmonise methodologies and registries often just add another logo to the pile. Yet scale is impossible without standardisation. Economies of scale, liquidity and sensible price discovery – all of it depends on a tonne being a tonne wherever and whenever it trades, and perhaps most importantly, on that tonne being real, tracked and verifiable.

Tracking, trust, and the plumbing that made equities work

This is where the parallel with capital markets is most instructive. Equities didn't become liquid and trustworthy because everyone woke up honest one morning. They became trustworthy because we built infrastructure that made dishonesty hard and embedded verification: central registries, settlement systems, audit trails and real-time data. A share is a share because the plumbing guarantees it is. You don't have to trust the counterparty; you trust the system.

Carbon needs precisely that plumbing – rigorous measurement, reporting and verification; an unbroken chain of custody from the moment carbon is captured to the moment it is durably stored; and independent verification you don't have to take on faith.

Full disclosure, this is the problem the company I chair was built to tackle. Carbonfuture provides a digital trust infrastructure for durable carbon removal, tracking a project from capture through to permanent storage and issuing a credit only once that storage has been independently confirmed. I won't pretend it is the whole answer – no single platform is today, and anyone who tells you otherwise is selling something. But the direction – automated, auditable and enforceable data on climate activities rather than a PDF document, a registry run from Excel, and good intentions – is exactly the road equities travelled a generation ago. The investment by SIX in Carbonfuture reflects that this is the direction carbon markets need to take: towards trusted, scalable infrastructure.

The endgame: from the pit to an asset class

Get the trust infrastructure right and something rather interesting happens. A verified activity removing a tonne of carbon durably becomes a genuinely fungible instrument to underpin climate claims or removal obligations – and fungible instruments are standardised, can be pooled, traded, and yes, securitised. Regionally first, as high-integrity voluntary supply and compliance schemes begin to converge; then, in time, globally. Carbon as an asset class isn't a gimmick or a bit of financial engineering looking for a home. It is simply what happens when an underlying finally becomes trustworthy enough to be priced properly.

So we are, I'd argue, at carbon's open outcry moment. It is noisy, fragmented, and nowhere near finished – but then, so was the trading floor in the old days. The unglamorous work now is to standardise the tonne, lay the plumbing, and make trust easy. Compliance and voluntary markets both have to grow up, and they have to do it together, because the alternative isn't a slightly messier market. It's a warmer planet, handed to the next generation with the invoice attached. That is one trade none of us should be willing to put on.

I'm just a simple markets man, so I'll leave you with a quote from someone much more knowledgeable than I: Nicolai Tangen, CEO of Norges Bank Investment Management (NBIM): "Climate risk is financial risk." We must ensure that we address this risk by helping carbon markets scale as efficiently and quickly as they can.