Carbon Credits and Voluntary Carbon Markets: An Investor's Guide

The past decade has seen carbon markets evolve from a niche policy instrument into a topic of genuine interest for institutional and private investors. The logic is straightforward: as governments tighten emission constraints and corporations face mounting pressure to meet net-zero commitments, demand for carbon credits could increase significantly. This makes carbon a commodity with potential investment characteristics.

However, the carbon credit landscape is fragmented, poorly regulated in parts, and subject to significant controversy. High-net-worth investors considering exposure to carbon markets need to understand the fundamental differences between compliance and voluntary markets, the available investment vehicles, the UK tax treatment (which is complex), and the very real risks that have materialised in this space.

What Are Carbon Credits?

A carbon credit represents the right to emit (or the offset of) one metric tonne of carbon dioxide equivalent (CO2e). There are two distinct markets:

The Compliance (Regulated) Market

Compliance carbon markets are created by statute and are mandatory for covered entities (typically large industrial installations, power generators, and airlines within the scheme's scope). Covered entities must surrender one allowance for every tonne of CO2e they emit.

The UK Emissions Trading Scheme (UK ETS) was launched in January 2021 following the UK's departure from the EU ETS. Covered entities include power stations, refineries, offshore oil and gas installations, and UK aviation. The compliance unit is the UK Allowance (UKA).

Key features of the UK ETS:

• The cap on total emissions declines each year, creating structural scarcity
• Allowances are auctioned by the UK government; covered entities may also purchase in the secondary market
• UKAs trade on the ICE Futures Europe exchange in London
• Prices have ranged from approximately £35 to £65 per tonne since the UK ETS launched, with significant volatility; prices as of early 2026 should be checked against current market data as they fluctuate materially with energy prices, weather, and policy developments

The EU ETS remains the world's largest and most liquid compliance carbon market, covering 27 EU member states plus Iceland, Liechtenstein, and Norway. The EU compliance unit is the European Union Allowance (EUA). UK investors in EUAs should be aware of currency risk and the divergence between UK and EU carbon policy.

The Voluntary Carbon Market (VCM)

The voluntary carbon market allows companies and individuals to purchase carbon offsets to compensate for emissions not covered by regulatory requirements — primarily to meet corporate net-zero or carbon neutrality pledges.

VCM credits are issued by projects that reduce, avoid, or remove carbon emissions: forestry conservation (REDD+ projects), renewable energy in developing countries, methane capture from landfill, direct air capture, and blue carbon (mangrove restoration, seagrass). Each verified tonne of avoided or removed CO2e generates one offset credit.

The two dominant VCM certification standards are:

• Verra's Verified Carbon Standard (VCS): the largest VCM standard by volume; issues Verified Carbon Units (VCUs)
• Gold Standard: higher-integrity standard with co-benefits requirements; tends to command a premium

VCM credit prices vary enormously depending on the project type, vintage, and co-benefits (social, biodiversity, community). Prices have ranged from approximately $3/tonne for lower-quality avoidance credits to $50+/tonne for high-quality removal credits and nature-based solutions with certified co-benefits.

Investment Vehicles for Carbon Exposure

Exchange-Traded Products (ETPs)

The most accessible route to compliance carbon market exposure is through exchange-traded products. Examples include:

• WisdomTree Carbon ETC (CARP): provides exposure to ICE EUA (EU) futures
• Sprott Carbon Credits ETF and similar vehicles in the US market
• Various ETP providers offering exposure to UK ETS (UKA) futures or a blend of compliance market allowances

These products are priced in line with the relevant futures contract and can be held in ISAs, SIPPs, and general investment accounts. They are liquid and low-cost relative to direct market participation. However, they track futures prices and therefore carry contango/backwardation effects depending on the futures curve structure.

Direct Purchase of Carbon Credits

Institutional investors and large family offices can participate directly in compliance carbon markets through ICE exchange membership or via brokers. For the voluntary market, platforms such as Xpansiv CBL (the largest VCM exchange), ACX (AirCarbon Exchange in Singapore), and Climate Impact X facilitate direct purchase and trading of offset credits.

Direct VCM investment requires significant due diligence capability: project-level analysis, vintage selection, registry verification, and counterparty management. This is generally not appropriate for individual investors without specialist expertise.

Carbon-Focused Funds

Some investment managers have launched funds specifically focused on carbon market exposure — blending compliance allowances, VCM credits, and equities of companies in the carbon services sector (verifiers, registries, offset project developers). These offer diversified exposure but add a layer of fund fees and active management risk.

Equities of Related Companies

Rather than owning carbon credits directly, investors can gain thematic exposure through equities of companies that benefit from carbon market growth: renewable energy developers, direct air capture companies, carbon project developers, and compliance consultants. This introduces company-specific risk alongside the carbon market dynamic.

UK Tax Treatment of Carbon Credits

The UK tax treatment of carbon credits is complex and depends on the nature of the holding and the taxpayer's circumstances.

Compliance Allowances (UKAs, EUAs)

Trading: Where an individual trades carbon allowances frequently as a business activity, profits are likely to be subject to income tax as trading income.

Investment: Where a non-trading individual holds carbon allowances as an investment, disposals are subject to capital gains tax. Carbon allowances are not shares or securities in a company — they are a form of intangible asset. Standard CGT rules (annual exempt amount, basic/higher/additional rate) apply to gains.

VAT: The secondary market for carbon allowances carries complex VAT treatment. Following widespread carousel fraud (MTIC fraud) in the EU ETS, the UK introduced a reverse charge mechanism for VAT on carbon allowances in 2010, placing the VAT accounting obligation on the recipient of the supply. Investors buying through mainstream ETPs typically do not encounter VAT directly, but those purchasing allowances in the secondary market should take VAT advice.

Voluntary Carbon Credits (VCUs, Gold Standard credits)

HMRC has not published definitive guidance on the tax treatment of voluntary carbon credits as of the date of this guide. The analysis generally follows the same logic as compliance allowances: held as investment = CGT on disposal; held as trading stock = income tax. However, the position is not settled, and professional tax advice should be obtained before making significant VCM investments.

VAT on Voluntary Credits

HMRC considers the supply of voluntary carbon credits (offset credits) to be a standard-rated supply for VAT purposes in most cases. Business purchasers can recover input VAT; non-business individual investors are unlikely to encounter VAT directly.

Risks and Controversies

Carbon credit investing carries substantial risks beyond normal investment price volatility.

Price Volatility

Compliance carbon prices (EUAs, UKAs) are highly sensitive to energy price movements, weather patterns (particularly for electricity demand), industrial output, and policy developments. The UK ETS price fell sharply in 2023 as energy demand declined. Prices can move 30–50% in a single year. This is not a conservative investment.

Additionality and Integrity in the VCM

The voluntary carbon market has faced serious criticism regarding the integrity of offset credits. Additionality — the requirement that a project genuinely reduces emissions that would not otherwise have been reduced — is the foundation of a credible offset. Multiple investigative reports in 2023 raised serious doubts about the additionality of widely held forest conservation (REDD+) credits, causing significant price declines and reputational damage to major corporate buyers and offset project developers.

Permanence is a related concern: forest carbon credits (representing CO2 stored in trees) can be reversed by fire, disease, or deforestation. Buffer pools and insurance mechanisms exist to address this, but they are not foolproof.

Greenwashing Risk

Corporate buyers of carbon offsets face significant scrutiny over whether their net-zero claims are genuine. If the VCM's credibility continues to be challenged, corporate demand for offset credits may diminish — reducing the market for investment-grade VCM assets.

Regulatory Risk

Both compliance and voluntary carbon markets operate within a regulatory and political context that can change rapidly. A government may alter its ETS cap, introduce windfall taxes on carbon allowances, or modify the rules governing VCM project eligibility. The UK ETS is still a young market and its regulatory framework continues to evolve.

Liquidity Risk

While compliance allowances (EUAs, UKAs) are relatively liquid during exchange trading hours, the VCM is largely OTC and lacks reliable secondary market liquidity for specific project credits. Direct VCM investments are illiquid and may be difficult to exit quickly.

A Note on Carbon Credits as an Asset Class

Carbon credits are a speculative asset class, not a traditional investment. The fundamental value driver — regulatory demand for compliance allowances, and voluntary corporate demand for offsets — is inherently political. Investors with genuine conviction in the long-term direction of carbon policy can find carbon markets an interesting thematic exposure, but it should represent a modest, risk-appropriate allocation within a diversified portfolio rather than a core holding.

High-net-worth investors drawn to the sustainability narrative of carbon credits should also consider whether direct investment in climate solutions — through private equity, infrastructure funds, or specialist asset managers — provides better risk-adjusted returns with greater underlying economic substance.

How Global Investments Can Help

Global Investments advises high-net-worth clients on the construction and management of diversified investment portfolios, including thematic allocations to sustainability and the energy transition. For clients interested in carbon market exposure, we can:

• Assess whether carbon credit exposure is appropriate within the client's overall risk profile and investment objectives
• Identify appropriate investment vehicles — ETPs, funds, or indirect equity exposure — proportionate to the client's sophistication and portfolio size
• Coordinate with specialist tax advisers to ensure the correct UK tax treatment is applied to carbon credit investments
• Monitor the evolving regulatory and integrity landscape in the VCM and compliance markets

Investments in carbon credits can fall as well as rise, and may fall to zero. Carbon market prices are particularly volatile. Tax treatment depends on individual circumstances and may change in future. This guide reflects market conditions and HMRC guidance as of June 2026 — both change frequently. Do not rely on this guide as tax or investment advice. Always seek qualified professional advice for your specific circumstances.

Contact Global Investments to discuss carbon market investment within the context of your broader portfolio.