A carbon market is just a helpful concept that equates the buying and selling of ‘carbon credits’ to the buying of selling of anything else. Like any other trading market, carbon markets bring together buyers and sellers to facilitate trade. And just like the ‘housing market’ is a concept that can be applied to various geographies and trading systems, so too can ‘carbon markets’.

What are the types of carbon markets

There are two important types of carbon market: compliance and voluntary. 

• Compliance markets are exclusive to national, regional and international policy or regulatory requirements. I.e if you are legally obliged to participate in the carbon markets then you do so on the compliance markets.
• Voluntary carbon markets are for the buying and selling of carbon credits on a voluntary basis. I.e for anything else.

Compliance markets

Compliance markets act as ‘cap-and-trade’ trade systems for different countries. Each country has a ‘cap’ on their emissions that once reached means they must ‘trade’ for ‘carbon credits’ to compensate for their excess emissions.

The cynics out there will be thinking ‘but why would they bother doing that at all, sounds like a hassle?’ That’s where the Paris Agreement comes in. The 192 countries who signed the Paris agreement agreed to ‘Nationally Determined Contributions’ where they laid out their commitments to reducing their emissions.

Compliance market examples

• The European Union launched the world's first international compliance market in 2005.
• In 2021 China launched largest compliance market that is estimated to cover one-seventh of global carbon emissions from fossil-fuels.
• The Clean Development Mechanism (CDM), adopted under the Kyoto Protocol in 1997 is another also a compliance market.

Voluntary markets

The voluntary market operates at a similar, and much simpler level. Individual people, or organisations, purchase carbon credits in-order to ‘compensate’ for their emissions. In this way aanyone can buy credits for whatever they like. To feel good, to support ‘emission reduction projects’, or to resell them for a profit at a higher price.

The future of carbon markets

If carbon markets are able to hold countries to a high standards of integrity and transparency, they can be one an effective method to solving climate change. They, in a way, put a price on emissions and create economic incentives to reduce emissions further. And, at the same time they support the development of other means of fighting climate change in the form of ‘climate action projects’.

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