Carbon markets exist under both compliance schemes and for actors to make voluntary avoided emission or enhanced removal claims. Compliance markets are created and regulated by mandatory national, regional, or international carbon reduction regimes. Voluntary markets function outside of compliance markets and enable companies and individuals to purchase carbon credits on a voluntary basis with no intended use for compliance purposes. Compliance carbon market credits may in some instances be purchased voluntarily, by non-regulated entities, but voluntary carbon market credits, unless explicitly accepted into the compliance regime, are not allowed to fulfill compliance market demand.
The concept of carbon offsetting arose in the late 1980s, as policymakers first began to seriously grapple with how to mitigate climate change. Although the first demonstrations of carbon crediting projects involved voluntary arrangements, the idea evolved into a tool for controlling costs within broader “market mechanisms” for addressing GHG emissions, including emissions trading systems. The first and largest carbon crediting program was the CDM, established under the Kyoto Protocol as a mechanism to allow developed countries to cost-effectively meet emission reduction obligations by investing in mitigation in developing countries. Because demand for compliance carbon credits is driven by regulatory obligations, their prices tend to be higher than carbon credits issued solely for the voluntary market.
Independent (meaning non-governmental) carbon crediting programs serving the voluntary market started to develop after 2005, as the CDM became more established and the corporate social responsibility community began to recognize that there was a demand for these instruments beyond just regulated companies and countries to the Kyoto Protocol. There are now a variety of independent carbon crediting programs primarily serving the voluntary market comprised primarily of corporations wishing to make avoided emissions or enhanced removal claims.
In some cases, non-compliance carbon credit programs have influenced and interacted with compliance markets. In California, for example, the Climate Action Reserve (CAR) developed a series of crediting project methodologies that were subsequently adopted (with some modification) by the California Compliance Carbon Offset Program. Carbon credits issued under these methodologies by CAR prior to the start of California’s cap-and-trade program were able to transition and become eligible for compliance. Countries like Mexico and South Africa have also recognized carbon credits issued by non-compliance crediting programs as a means of complying with carbon tax obligations.
For information on crediting programs, see:
Independent Crediting Programs
Carbon Market Actors
Brokers and Exchanges
In the carbon credit wholesale market, emission credit buyers and sellers can have transactions facilitated by brokers or exchanges. Exchanges are usually preferred for frequent trades or large volumes of products with standardized contracts or products, while brokers typically arrange transactions for non-standardized products, occasional trades, and small volumes.
Traders
Professional carbon credit traders purchase and sell avoided emissions or enhanced removals by taking advantage of market price distortions and arbitrage possibilities.
Credit Providers
Credit providers act as aggregators and retailers between project developers and buyers. They provide a convenient way for consumers and businesses to access carbon credits from a portfolio of projects.
Final Buyers or End-Users
Individuals and organizations purchase carbon credits to counter-balance GHG emissions. Therefore, the final buyer has no interest in reselling the credit but will prompt the retirement of the carbon credit.