Carbon markets Q2 update: policy shifts and market evolution

The carbon landscape continues to evolve rapidly as governments worldwide recalibrate their climate policies. From expanding offset acceptance in compliance markets to new maritime carbon pricing frameworks, recent developments highlight both the growing momentum behind carbon mechanisms and the persistent challenges in ensuring market integrity and supply quality. 

Our analysis covers four critical areas shaping the carbon market: the increasing integration of offsets into compliance regimes, the IMO's landmark approval of global shipping carbon pricing, emerging policy uncertainties in the EU's sustainability framework, and the diverging climate approaches across major economies as political landscapes shift. 

Read on for a teaser of this update or fill in the form to access the analysis of all four key points. 

More countries endorse carbon offsets for compliance, high-quality supply remains a challenge 

Author: Shashank Atreya 

Carbon pricing regimes globally are increasingly accepting carbon credits or offsets for compliance, as efforts to strengthen market integrity gather pace. Vietnam and Brazil have proposed generous offset limits, while South Africa plans to recognise offsets under the upcoming Paris Agreement Crediting Mechanism (PACM) framework to spur its local market. South Africa currently allows 5–10% offset usage based on sector, with a 5% increase confirmed for 2026.   

Vietnam’s pilot emissions trading system (ETS), launching in August 2025, aims to allow up to 30% offset usage, with full implementation expected by 2029. Brazil has proposed to allow 5-20% of offset usage under its upcoming ETS. Singapore already allows 5% usage of offsets under its carbon tax and has now allowed usage of offsets from projects under Article 6.2 following several recent bilateral agreements.          

Canada’s federal GHG offset system, established in 2022, made its first ever issuance to a landfill gas project earlier in June 2025. Canada allows the use of offsets from its federal GHG Offset System for compliance across provincial and federal regimes. Under this system, project developers can register and have their projects accredited to generate compliance recognisable offsets. The UK continues discussions on offset use, recently signaling a preference for domestic removals and indicating that any inclusion of offsets would require lowering the ETS cap. 

Our take: Growing acceptance of offsets for compliance is an outcome of the global initiatives such as PACM that aim to strengthen offset quality. However, despite this progress, key challenges include a limited supply of high-quality and insufficient policy support for developers. With expanding compliance markets, international mechanisms like CORSIA and companies with net zero goals driving demand for high quality offsets, we anticipate increased offtake agreements as participants secure long-term certainty on volume and pricing 

Allowing offset usage for compliance requires careful calibration of allowable percentages, eligible offsets, and pricing dynamics. Offsets must be competitively priced to complement allowance purchases without trading at premiums that push entities to rely solely on allowance markets. 

Established markets like California reflect this balance. It has fostered an active secondary market and often achieved full auction clearance, creating a compelling financial case for using offsets to meet a portion of compliance obligations. Its 4% restriction on offset usage has further helped prevent an oversupply and kept prices competitive. In May 2025, California compliance-eligible offsets traded at US$13.01, a 50% discount to carbon allowances at US$26.02. This has provided consistent demand for US project developers and enabled investment commitments relying on the California market. 

The success of proposals in Vietnam, Brazil, and South Africa to increase offset usage hinges on project developers’ ability to deliver high-quality offsets. To incentivise project developers to participate, regimes must ensure program targets are comprehensive, periodically scale up sectoral coverage, and maintain strong offset verification protocols. This will create commercial viability for offset developers and investors while also generating high-quality offsets to meet program demands. 

Fill out the form to access our insights on these key developments: 

• IMO approves global carbon pricing for shipping 
• Potential policy uncertainty for companies operating in the EU 
• Australia and Canada strengthen carbon pricing as the US retreats from climate disclosure