Exploring Global Carbon Markets: Voluntary vs. Compliance

Exploring Global Carbon Markets: Voluntary vs. Compliance

Carbon credits are valuable tools for addressing climate change, but let's set the record straight on what they are not:

1.Not a Magic Solution: Carbon credits are not a cure-all for climate change. They should be a last resort when decarbonization isn't feasible.

2.Not a Replacement for Emission Cuts: Carbon credits should complement, not replace, emission reduction efforts. Leading standards demand substantial cuts before credits are used.

Types of Global Carbon Markets: Voluntary and Compliance

Now that we've clarified what carbon credits are not, let's explore the two main types of global carbon markets.

Compliance Carbon Credit Markets:

Compliance carbon credit markets, also known as mandatory markets, are established by legislation. These markets operate within a cap-and-trade system, where emissions are capped for specific sectors, with caps typically decreasing over time to encourage decarbonization. Here's how they work:

•Companies that produce fewer emissions than their allotted limit can convert the surplus into carbon credits, which can be sold or saved.

•Companies exceeding their emission limits must either purchase new carbon credits or use previously saved ones.

Over 30 compliance carbon credit markets currently operate worldwide, covering a substantial portion of global emissions. Examples include the EU's Emissions Trading Scheme, China's market, Australia's market, and Canada's market.

Voluntary Carbon Credit Markets:

Voluntary carbon credit markets provide organizations with the flexibility to purchase and sell carbon credits voluntarily. These credits represent an anticipated reduction of one tonne of CO2e emissions. To align with ambitious climate commitments, the voluntary carbon credit market has grown significantly. However, it comes with challenges:

•Quality Verification: Validating carbon credits is complex, ensuring they genuinely reduce emissions, are permanent, and do not pose risks like fires or diseases.

•Double Counting: Lack of a central registry may lead to the same credits being sold multiple times, posing risks of double counting.

•Transparency: Different methodologies for counting emissions reductions create transparency issues, making it challenging for companies to assess the credits they buy. Additionally, the allocation of funds within the carbon credit process lacks transparency.

Conclusion:

Understanding what carbon credits are not is crucial. They should complement a broader decarbonization strategy, requiring transparency and quality verification for credibility in the fight against climate change.

Explore in our upcoming blog: "The Mechanics of Carbon Credits."