Carbon Trading and Compliance: A Comprehensive Guide
The global compliance carbon markets (CCMs) have developed rapidly in recent years, with 36 emission trading systems (ETSs) currently operating worldwide, covering approximately 18% of global greenhouse gas emissions (9.9 GtCO2e). The carbon market can be complex, and a simple way to understand it is to separate the two major sectors - Voluntary Markets and Compliance Markets. This guide focuses on Compliance Carbon Markets, also known as Emissions Trading Systems (ETS).
Compliance Carbon Credit Market Overview
The compliance carbon market aims to establish a carbon price by laws or regulations, which control the supply of allowances that are then distributed by national, regional, and global regimes. This can be accomplished through either a carbon tax or a cap-and-trade scheme, shifting economic incentives by making it more expensive to pollute. Compliance carbon markets cut emissions at scale and explore cap-and-trade, carbon taxes, and systems like UK ETS, CARB, and RGGI.
Key Components of Compliance Carbon Markets
- Carbon Pricing Mechanisms: Compliance carbon markets establish a carbon price through laws or regulations, controlling the supply of allowances.
- Cap-and-Trade Schemes: A cap-and-trade scheme is a market-based approach to reducing greenhouse gas emissions, where a central authority sets a limit on emissions and issues tradable permits that entities can buy or sell.
- Carbon Taxes: A carbon tax is a direct tax on the carbon content of fossil fuels, providing a strong economic incentive to reduce emissions.
- Emissions Trading Systems (ETS): An ETS is a market-based system where entities buy and sell emissions allowances, with caps on overall emissions and penalties for non-compliance.
