The Invisible Market: Carbon and Green Certificates

A large German automotive manufacturer announces, in its annual sustainability report, that all of its European factories now operate on one hundred percent renewable electricity. The press release is detailed and credible. Independent auditors have verified the claim. The company’s customers, employees, and shareholders are reassured that the cars rolling off the assembly lines are being produced with electricity from wind, solar, and hydro sources.

There is just one problem. Those factories draw power from the same interconnected European grid that supplies every other German factory, office, household, and tram system. Their physical supply is not a dedicated stream routed only from the renewable plants named in their contracts. The electrons in each local conductor mainly oscillate there, while electrical energy is transferred through a shared network whose operation is supported at every moment by a changing mix of natural gas, lignite, biomass, nuclear and renewable generation. No isolated physical delivery path links one contracted generator to one consumer. So in what sense, exactly, is the company’s claim true?

This is the puzzle at the centre of one of the most consequential, and most poorly understood, features of the modern European energy system. The claim is true. The audit is real. The system is meaningful. But to understand why, we need to make a conceptual move that may at first feel artificial: we need to separate the physical flow of energy from the financial and contractual flow of value attached to it. Once we make that move, everything else becomes clear.

Here is the key distinction. Electrical energy is transferred through the interconnected grid. Money and certificates move through accounts and contracts. These two layers are related, but they are not the same: the physical system is continuous and shared, while the contractual layer is itemised, traceable, and governed by markets, registries, and regulation.

An analogy may help. When you deposit one hundred euros in your bank account, the bank does not store your specific banknotes in a vault with your name on them. Your money becomes part of the bank’s general pool of funds. When you withdraw one hundred euros, you do not receive your original banknotes back; you receive different banknotes (or, more often these days, a digital transfer) of equivalent value. The bank maintains a ledger of who is owed what, and the ledger is the meaningful record — not the location of any specific physical banknote.

The comparison works at the accounting level, but the physics is different. In an alternating-current grid, the electrons already present in each conductor mainly oscillate locally; they do not travel from a particular power plant to a particular consumer. Changes in the electromagnetic field propagate through the network and transfer energy. Producers inject electrical energy into the shared system and consumers draw energy from it, but no individual megawatt-hour follows a dedicated, physically labelled route from one generator to one customer. The financial-contractual layer records who produced what, who paid for what, and which environmental attributes belong to which megawatt-hour. That record is real, audited, and consequential even though physical delivery remains shared.

The certificates and allowances we are about to discuss are entries in this contractual record. They exist in registries, are bought and sold, have prices, and produce legal effects. They are not attached to a dedicated physical flow of electricity; instead, they are the mechanism through which environmental attributes are allocated and the European economy is progressively reorganised toward lower-carbon outcomes.

The GO system has critics, and the criticism is not unreasonable. The price of GOs has historically been low — sometimes only a few euros per megawatt-hour — and at such prices, the additional revenue to renewable generators is modest relative to their total income. Sceptics argue that the GO market is too thin to drive meaningful new investment in renewable capacity, and that companies use cheap GOs to make corporate sustainability claims that are technically accurate but economically marginal.

A fair response acknowledges both the validity and the limits of this criticism. Yes, GO prices have been low historically, and yes, the GO market alone does not solve the renewable financing challenge. But the system has been evolving. Newer corporate procurement frameworks demand temporal matching (the GOs must correspond to renewable generation in the same time period as the consumption) and geographic matching (the GOs must come from the same regional grid as the consumption). The European Union has introduced more rigorous disclosure requirements for corporate renewable claims through the Corporate Sustainability Reporting Directive (CSRD). And industry-led initiatives like the “24/7 carbon-free energy” movement are pushing toward hourly matching of generation and consumption, which would substantially raise the integrity bar.

The GO system is, in other words, an imperfect mechanism that is improving over time. The fact that it is imperfect does not make it fraudulent. The improvements being made to it should be expected and welcomed.

A large European manufacturer typically interacts with both systems simultaneously. If the manufacturer operates large industrial installations covered by the EU ETS, it has a regulatory obligation to surrender EUAs corresponding to its annual emissions. This is a hard requirement: failure to surrender sufficient EUAs results in substantial financial penalties and reputational damage. If the manufacturer wants to make voluntary sustainability claims — for example, to report to its customers and investors that it operates with renewable electricity — it can purchase and retire GOs corresponding to its electricity consumption. This is a voluntary commitment, but increasingly expected by major customers, by sustainability-focused investors, and by the EU’s own corporate reporting framework.

These two systems work in different ways, target different audiences, and serve different functions. The EU ETS is a regulatory backbone that forces an aggregate reduction in covered emissions. The GO system is a voluntary mechanism that allows companies to make verified renewable claims and provides incremental support for renewable generation. Together, they constitute the financial-contractual layer that overlays the physical European energy system — the invisible market that, in aggregate, is reshaping how the European economy works.

Step back, for a moment, from the operational details.

What we are watching, across the European economy, is one of the largest deliberate economic experiments in modern history. The cost of greenhouse gas emissions, which for most of industrial history was effectively zero — an externality borne by the atmosphere and, ultimately, by future generations — has been progressively internalised through a combination of regulatory cap, traded price, and corporate disclosure. The mechanism is imperfect. The price is variable. The coverage is incomplete. Various design choices remain contested. The implementation requires continuous policy adjustment.

But the experiment is also working. Greenhouse gas emissions from the sectors covered by the EU ETS have fallen substantially since the system was introduced in 2005, even as economic output has grown. Renewable electricity has expanded to provide a major share of European generation. Corporate sustainability reporting is now a structured, comparable, regulator-overseen activity rather than a marketing exercise. The transformation has been driven by a combination of policy, technology, and these market mechanisms — and the market mechanisms are an essential part of the package.

The invisible market is, in this sense, doing exactly what markets are supposed to do: translating the abstract logic of policy commitments into the concrete economic decisions of millions of producers and consumers, distributed across countries and sectors, in a way that no single planner could have orchestrated.