A new report highlights how governments are leaning into emissions trading as a pragmatic, flexible mechanism to deliver emissions reductions.
A new report from the International Carbon Action Partnership (ICAP), Emissions Trading Worldwide: ICAP Status Report 2026, provides a detailed and timely assessment of how carbon markets are evolving in an increasingly complex global environment. The report situates emissions trading systems (ETSs) within a broader context defined by intensifying climate impacts, geopolitical fragmentation, and economic uncertainty. Extreme weather events, energy system disruptions, and resource constraints are no longer abstract risks, they are actively shaping economic planning and policy decisions. At the same time, competing political priorities, affordability concerns, and shifting global alliances have made sustained climate action more challenging. Against this backdrop, the continued expansion and strengthening of ETSs is notable. Rather than retreating, governments are leaning into emissions trading as a pragmatic, flexible mechanism capable of delivering emissions reductions while supporting economic stability and fiscal resilience.
Globally, emissions trading has reached a new level of scale and significance. A total of 41 ETSs are now in force, with 16 more under development or consideration, collectively covering 26% of global greenhouse gas emissions and spanning jurisdictions responsible for 63% of global GDP. These systems generated nearly USD 79 billion in revenues in 2025, reinforcing their dual role as both climate policy tools and important sources of public funding. Importantly, growth is no longer concentrated in advanced economies. Emerging and middle-income countries – particularly in Asia and Latin America – are now driving much of the expansion, embedding carbon markets into national development strategies and aligning them with updated climate commitments under the Paris Agreement. This shift signals a transition from emissions trading as a regional policy experiment to a truly global framework for managing carbon.
Several structural trends define the current phase of ETS development. First is the broadening of sectoral coverage. Early systems often focused on the power sector, where emissions are concentrated and easier to measure. Today, systems are extending into more complex and politically sensitive areas, including heavy industry, buildings, transport fuels, maritime shipping, and waste. This expansion reflects a growing recognition that meaningful decarbonization requires economy-wide carbon pricing signals, even in sectors that are harder to abate. As a result, ETSs are evolving from targeted instruments into comprehensive policy frameworks capable of influencing entire economic systems.
Second, the report highlights a deepening of ambition and refinement of system design. Many jurisdictions are tightening emissions caps in line with net-zero targets, while also improving allocation mechanisms and increasing the share of allowances distributed through auctions. A notable trend is the gradual transition from intensity-based systems to absolute caps, particularly in more mature markets, reflecting a shift toward stricter emissions limits and greater environmental certainty. At the same time, emerging economies continue to adopt hybrid and intensity-based approaches tailored to their growth trajectories, illustrating the flexibility of ETS design in accommodating different economic contexts.
Third, ETSs are increasingly being integrated into broader policy ecosystems. Governments are combining emissions trading with complementary instruments such as carbon taxes, offset crediting mechanisms, and carbon border adjustment mechanisms (CBAMs). This integrated approach enhances policy effectiveness while addressing key challenges such as carbon leakage, cost containment, and investment certainty. The growing prominence of CBAMs in particular signals a new phase in carbon pricing, where domestic climate policy and international trade are becoming more tightly linked, with significant implications for global supply chains.
The report also emphasizes the importance of political durability and public acceptance, particularly as carbon pricing begins to affect households more directly. Governments are responding by embedding ETSs within broader legislative frameworks, strengthening stakeholder engagement, and prioritizing transparent and equitable use of revenues. Increasingly, proceeds from carbon markets are being directed toward climate investments, industrial transition, and financial support for vulnerable groups. In some jurisdictions, this shift is reflected in a rebranding of systems as cap-and-invest programs, highlighting the link between carbon pricing and tangible societal benefits. These efforts are critical to maintaining public trust and ensuring the long-term viability of ETSs in a politically sensitive environment.
Another key theme is the growing focus on competitiveness and flexibility. As carbon costs rise, policymakers are refining tools to protect emissions-intensive, trade-exposed industries while preserving incentives to decarbonize. Free allocation remains an important mechanism, but it is becoming more targeted and is expected to decline over time. In parallel, alternative approaches such as CBAMs are gaining traction, shifting the focus from internal protections to border-level adjustments. The role of offsets and carbon removals is also expanding, particularly as systems confront the challenge of decarbonizing hard-to-abate sectors. These mechanisms provide flexibility and cost containment but raise important questions around environmental integrity and market design.
Finally, the report underscores a significant shift toward greater international cooperation and market connectivity. The development of frameworks under Article 6 of the Paris Agreement is creating new opportunities for cross-border carbon trading and the integration of domestic and international markets. At the same time, new coalitions and platforms for collaboration are fostering a shared body of knowledge and best practices. This growing community of practice is helping jurisdictions learn from one another, accelerate implementation, and avoid common pitfalls. In an increasingly fragmented geopolitical landscape, this cooperation is emerging as a critical enabler of coherent and effective global climate action.
Taken together, the ICAP Status Report 2026 paints a picture of a policy instrument that is no longer experimental, but foundational. Emissions trading systems are becoming central to how governments manage the transition to low-carbon economies – balancing environmental ambition with economic realities, and domestic priorities with global coordination. While challenges remain, particularly around political acceptance, competitiveness, and system integration, the trajectory is clear: ETSs are set to play an increasingly pivotal role in shaping the future of global decarbonization.
💡 ETS coverage now spans a significant share of global emissions and economic output, with continued expansion across both developed and emerging economies. For industry, this signals a clear shift: carbon costs are no longer a marginal or regional consideration but a core input into long-term strategy, capital allocation, and competitiveness. Companies operating across jurisdictions must prepare for increasing exposure to carbon pricing mechanisms, including indirect impacts through supply chains and trade policies such as CBAMs. Early adaptation – through emissions reduction, operational efficiency, and carbon market participation – will increasingly differentiate leaders from laggards.
💡 The evolution of ETSs toward broader sectoral coverage, tighter caps, and integration with complementary policies reflects a move toward holistic decarbonization systems rather than standalone instruments. For businesses, this means that compliance strategies must extend beyond managing allowance costs to engaging with a wider ecosystem that includes offsets, removals, regulatory incentives, and cross-border mechanisms. Companies that understand and leverage these interconnected systems, rather than treating them as isolated compliance obligations, will be better positioned to optimize costs and unlock new value streams.
💡As governments refine tools to address carbon leakage and protect domestic industries, including targeted free allocation and border adjustments, the competitive landscape is being reshaped. Firms that proactively reduce emissions intensity and align with emerging policy frameworks will benefit from preferential treatment, lower compliance costs, and enhanced market access, while carbon-intensive operations risk exposure to escalating costs and trade barriers. In this context, carbon management is no longer just an environmental concern, it is becoming a central determinant of industrial competitiveness and resilience in a decarbonizing global economy.
