Carbon markets are a critical instrument for providing one of the flexible mechanisms aimed at economically reducing CO2 emissions. The main way to solve the global warming problem is the accumulation of greenhouse gases in the atmosphere.
The undeniable truth is that we only have one atmosphere. Regardless, it makes little difference where the emissions are produced. They will quickly spread throughout the globe, causing the greenhouse effect. If a group of people, countries, or businesses agree to limit their emissions to a certain amount (aka establish a “carbon budget”), it makes no difference how much each person emissions or where they emit it, as long as the group as a whole does not emit more than what they are committed to. Specifically, the argument for carbon trading is that the best approach to taking climate action is to reduce emissions where it is most straightforward.
Different types of carbon markets
In order to understand how the different carbon markets around the globe function, we have to distinguish them. Types of carbon markets: the compliance markets and the voluntary markets. In both cases, it’s a tonne of CO2 that is being bought and sold in this industry.
Compliance carbon markets
The compliance carbon markets, mandatory markets, are organized by governments aiming to reduce the emissions of GHGs by certain industries. In these marketplaces, regulated organizations can buy and sell emissions permits (allowances) or offsets to achieve specified regulatory targets. Participants in cap-and-trade regimes, which frequently include both emitters and financial intermediaries, are permitted to exchange allowances. The main aim is to profit from unused allowances or to meet regulatory requirements. Examples of compliance carbon markets are the European Union emissions trading system, the California emissions trading system, and the United Nations Clean Development Mechanism.
Voluntary markets, as opposed to compliance markets, are established by private enterprises. They construct and operate their own marketplace to facilitate exchanges of carbon offsets, the act of decreasing carbon dioxide emissions into the environment. They are incentive-based marketplaces in which individuals and private companies can buy carbon offsets or credits on a non-mandatory basis. In other words, market participants use their voluntary market to connect buyers and sellers of carbon credits. The particular markets coexist alongside compliance offset markets.
Is there a difference between carbon offset and carbon allowances?
A government issues carbon allowances as part of an emissions cap-and-trade regulatory regime. Each allowance (or emissions permit) normally entitles the holder to emit one tonne of a pollutant such as CO2e. The supply of GHG allowances is limited by the legislated ‘cap’ in a cap-and-trade system. Allowances can be freely allocated by the controlling program, purchased at auctions, or purchased from other entities with excess.
In addition, carbon allowances are either acquired by regulated emitters, commonly through auction or granted free of charge based on predicted carbon emissions. They depend on the specific market or trading scheme. If a participant produces fewer tonnes of carbon than anticipated, they may sell any extra carbon permits. They sell to those whose emissions have surpassed their objectives, creating a market for carbon allowances. The location of the emission sources covered by a cap-and-trade scheme is determined by the program’s scope. They are defined by regulation or law.
Programs exist in the European Union, the United States, Canada, and developing systems across the world. They include China, Korea, and South America. While a carbon offset represents one tonne of carbon dioxide or similar greenhouse gas, it is created by a decrease in emissions. It is achieved through a voluntary initiative established particularly for that purpose. Carbon offsets are created by initiatives with well-defined goals that are often located outside of a company’s own operational sites. Carbon offset programs enable people and businesses to invest in environmental initiatives throughout the globe to offset their own carbon footprints.
The initiatives are mainly centered in developing countries and are intended to minimize future emissions. This might entail implementing renewable energy technology or acquiring and reselling carbon credits from an emissions trading mechanism. A carbon offset is therefore in addition to any decrease in emissions obtained by regulatory compliance or participation in a required scheme.
In the words of Mr. De Boer. The Kyoto Protocol, putting a price on carbon, has created a “unique environmental commodity” on the international market.
Written by our Energy Enthusiast
Pavlos has a Bachelor’s in International and European Studies from the Panteion University of Athens. He has worked successfully at a Law Firm in Kolonaki, Athens. Currently, he is working at a Solution Provider/System Integrator Company in Athens. Postgraduate student of the MSc in Energy: Strategy, Law, and Economics at the University of Piraeus in the faculty of International and European Studies. Speaks Greek, English, and German. He is keen on Middle East culture and history.