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What are carbon markets?

Recently the Intergovernmental Panel on Climate Change (IPCC) published a brand new report on the world’s progress toward the slowing of climate change. The bad news is that greenhouse gas (GHG) emissions are rising across all major industries worldwide, though at a slower rate. The good news is that renewable energy sources are becoming affordable, less expensive than oil, coal, and gas.

Although there has been some improvement, planet is facing a daunting problem. Scientists warn that 2 degrees Celsius of warming could be achieved in the 21st century, unless we can achieve massive reductions in greenhouse gas emissions today.

Effective action will require coordinated and sufficient investments, understanding that the price of not doing anything will be more costly. Countries in developing countries will require at least $6 trillion in 2030 to fund not less than the half of their climate change objectives (as stated as part of the Nationally Determined Contributions (also known as NDCs).

The most recent IPCC report has found that the world is all falling far short of the goal, with the flow of money being three to six times less than what is needed by 2030 . And there are more stark differences in certain regions around the globe.

How do we accelerate and finance the change needed to solve our climate crises? Many countries are considering carbon markets as a part of the solution.

How do carbon markets work?

In simple terms, carbon markets function as trading platforms that allow carbon credits to be sold and purchased.

One carbon credit tradable equals one ton of carbon dioxide , or the same of a greenhouse gas that is reduced to a minimum, sequestered or eliminated.

What types of carbon markets are there?

There are two main types that exist in carbon market: voluntary and compliance.

Markets for compliance are developed by any regional, national and/or international regulatory or policy requirement.

Voluntary carbon markets, both national and international are the issue or buying or selling carbon credit on a basis of voluntary.

The current supply of free carbon credits is mostly from private companies who design carbon projects or government agencies that create programs that are certified by carbon standards which result in emission reductions or removals.

Demand is driven by private individuals who wish to pay for their carbon footprint, companies that have sustainability goals for their corporate operations and other entities that want to exchange credits for a greater price to make money.

Which are the best examples?

One kind of market for compliance that many people are familiar with is the emissions trading system (ETS). They operate on a “cap-and-trade” principle Regulated businesses – or even nations, as in the instance of the European Union’s ETS and ETS – are issued pollution or emission permits or allowances from government officials (which total to the maximum amount of a certain amount, or limit). Polluters who exceed their permissible emission levels must purchase permits from those who have permits to purchase (i.e. trade).

The European Union launched the world’s first international ETS in 2005. The year before, China launched the world’s largest ETS that is estimated to be covering around one-seventh global carbon emissions resulting from the burning of fossil fuels. Numerous other national and subnational ETS are in operation or in the process of being developed.

For more information on carbon credits visit