EM Emissions Trading Schemes Await Wider Reporting

To date, emissions trading schemes (ETS) have mostly been a developed-market phenomenon. This has led to criticism that they may potentially be driving carbon-intensive industries into less-regulated markets.¹ Two developments may alter the status quo: emerging economies such as Turkey, Indonesia and Colombia have recently announced plans for their own ETS, and, in October 2023, the EU introduced a Carbon Border Adjustment Mechanism (CBAM).

The CBAM requires importers of carbon-intensive products such as steel, cement and aluminum to report emissions generated throughout production and transport. From 2026 importers will also need to pay a levy equivalent to the difference in carbon prices.² This could potentially incentivize other markets to adopt domestic carbon-pricing policies and ETS to redress the differences. And there is plenty of scope for these schemes to grow — according to the World Bank, existing ETS covered 23% of global emissions as of 2023, up from 7% in 2010.³

Our research found that 843 companies, or 9% of constituents in the MSCI ACWI Investable Markets Index (IMI), reported that they were regulated by an existing ETS in 2023. Of these 843 companies, 88% reported emissions breakdown from regulated markets. Yet among constituents in markets planning or considering ETS, the overall disclosure rate dropped to 18% (272 out of 1,532). Robust and transparent emissions reporting is the basis for carbon crediting mechanism.⁴ In the absence of clear starting points, investors and governments alike may find they are neither able to track corporate emissions reduction progress, nor analyze the effect of potential drivers such as ETS for country-level emissions trends. As the saying goes: you can’t manage what you can’t measure.