Carbon markets are systems that allow the trading of carbon credits or offsets between entities that emit greenhouse gases (GHGs) and those that reduce or remove them. Carbon markets aim to provide an incentive for reducing GHG emissions and to lower the cost of achieving climate goals. There are two main types of carbon markets: compliance and voluntary.
Compliance Carbon Markets
Compliance carbon markets are created by regulations that require certain entities to limit their GHG emissions or to buy permits or allowances that correspond to their emissions. These regulations can be at the national, regional or international level. For example, the European Union Emissions Trading System (EU ETS) is a regional compliance market that covers more than 11,000 power plants, factories and airlines in 31 countries. The EU ETS sets a cap on the total GHG emissions allowed by these entities and allocates or auctions permits that can be traded among them. Entities that emit more than their permits must buy additional permits from those that emit less or face penalties.
Compliance carbon markets can also be linked to international agreements such as the Paris Agreement, which aims to limit global warming to well below 2°C above pre-industrial levels. The Paris Agreement allows countries to cooperate in achieving their nationally determined contributions (NDCs) through a mechanism called Article 6. Article 6 enables countries to trade carbon credits generated by emission reduction or removal activities that go beyond their NDCs. For example, a country that installs more renewable energy than its NDC target can sell the excess emission reductions to another country that needs them to meet its own NDC target.
Voluntary Carbon Markets
Voluntary carbon markets are driven by the demand and supply of carbon credits or offsets without any regulatory obligation. Voluntary carbon markets cater to individuals, organizations or governments that want to compensate for their GHG emissions by supporting projects or programs that reduce or remove GHG emissions elsewhere. For example, an airline company may offer its customers the option to offset their flight emissions by buying carbon credits from a forest conservation project in Brazil.
Voluntary carbon markets operate through various standards and platforms that certify and verify the quality and quantity of emission reductions or removals generated by different projects or programs. These standards and platforms also ensure that the carbon credits are not double counted or sold more than once. Some of the most widely used standards and platforms in the voluntary carbon market are the Verified Carbon Standard (VCS), the Gold Standard, the American Carbon Registry (ACR) and the Climate Action Reserve (CAR).
Benefits and Challenges of Carbon Markets
Carbon markets offer several benefits for addressing climate change. They can:
- Provide a flexible and cost-effective way to reduce GHG emissions across different sectors and regions
- Mobilize financial resources and investments for low-carbon development and innovation
- Encourage behavioral change and awareness among emitters and consumers
- Support co-benefits such as biodiversity conservation, poverty alleviation and social inclusion
However, carbon markets also face several challenges and limitations. They can:
- Be subject to market volatility, uncertainty and manipulation
- Create perverse incentives or loopholes for emitters to avoid real emission reductions
- Fail to address the root causes of GHG emissions such as fossil fuel dependence and consumption patterns
- Displace or harm local communities and ecosystems that host emission reduction or removal projects
Also see; https://carbontier.de/a-global-perspective-on-international-climate-policies/
