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How many types of carbon markets are there?

Recently the Intergovernmental Panel on Climate Change (IPCC) published a brand new report on the progress made by humanity towards the slowing of climate change. The bad news is that greenhouse gas (GHG) emissions are increasing across all major sectors across the globe, but at a slower rate. The good news is that renewable energy sources are becoming affordable, more affordable than oil, coal, and gas.

Even with some improvements, the planet is facing a daunting problem. Scientists warn that 2 degrees Celsius of warming will be surpassed in the 21st century unless we make massive reductions in greenhouse gas emissions today.

Effective action will require coordinated and adequate investment, recognizing that the price of not doing anything will be more costly. The developing world will require at least $6 trillion by 2030 to finance less than the 50% of their climate action targets (as stated within the Nationally Determined Contributions (also known as NDCs).

The most recent IPCC report shows that every country is falling far short of the goal, with financial flows ranging from three to six times less than what is needed by 2030 . And there are more stark differences in certain regions around the globe.

How can we facilitate and finance the change needed to solve this climate catastrophe? A lot of countries are looking at carbon markets as a part of the solution.

Are carbon market markets a good thing?

In a nutshell carbon markets function as trading platforms that allow carbon credits to be traded and purchased.

A carbon credit that can be traded is one ton of CO2 or an equivalent of another greenhouse gas that is reduced by sequestration or avoided.

What types of carbon markets are there?

There are generally two kinds that exist in carbon market: voluntary and compliance.

Markets for compliance are developed due to any national, regional or international policy or regulation.

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

The current supply of free carbon credits is mostly from private companies who design carbon projects or from governments who develop carbon standards-certified programs which result in emission reductions or removals.

Demand is driven by private individuals who want to offset their carbon footprint, companies that have sustainability goals for their corporate operations and other entities that want to sell credits at a higher cost in order to earn a profit.

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Which are the best examples?

One kind of compliance market that a lot of people are familiar with is the emissions trading system (ETS). Based on the “cap-and-trade” principle Regulated businesses – or even nations, as in the EU’s ETS and ETS – are issued pollution or emission permits or allowances from government officials (which can be used to reach an overall maximum of a certain amount, or limit). Polluters who exceed their permissible emissions are required to purchase permits from other companies with permits that are available 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 which is expected to cover about one-seventh of global carbon emissions resulting from the burning of fossil fuels. A number of subnational and national ETS are in operation or in development.