What is a carbon market? The carbon market is a trading system in which greenhouse gas (GHG) emissions are assigned a monetary value in the form of carbon creditsTypically, one carbon credit is equal to one metric ton of CO2 or equivalent. amount of another greenhouse gas (CO2e). These markets use market forces to motivating industry and countries to reduce or eliminate CO2e emissions, thereby supporting the development of clean energy and CO2e removal technologies. If managed effectively, they can help countries meet their climate goals under the Paris Agreement. There are two main types of carbon markets: mandatory (regulatory or mandated) and voluntary.

Obligatory carbon markets (Compliance Carbon Markets) These markets can be based on a system "cap and trade" or on the system "baseline and credit".

• Cap and Trade system: Regional, national or international body sets a limit (cap) on the amount of CO2e that specific sectors or countries can produce. This limit is divided into emission permits (“allowances”) that are granted or sold to market participants. If a participant’s emissions are below the limit, it can sell its unused allowances to others. The total limit decreases over time, increasing demand and the price of credits. The largest cap and trade markets in the world are the EU Emissions Trading System (EU ETS), the Chinese ETS and the UK ETS. In May 2025, the UK and the EU committed to linking their ETSs.
• "Baseline and Credit" system: Instead of the total limit the regulatory authority sets a baseline level of acceptable emissions for a given activity or sector, usually based on historical emissions. Companies can trade offsets (emission reduction units) representing a tonne of CO2e already reduced. Examples are the Safeguard mechanism in Australia and CORSIA.
• Challenges of mandatory markets: These markets use quantity to determine the price of carbon, which provides certainty about emissions, but uncertainty about price, which is a problem for businesses. The key shortcoming is that the price of carbon credits was too low to properly motivate participants to reduce emissions. To meet the Paris Agreement targets, carbon prices should be in the range of $50-100/tCO2e by 2030, but most prices are significantly lower. Regulators must also ensure that penalties for non-compliance are sufficiently high (e.g. €100/tCO2e in the EU ETS). In the absence of global markets, there is a complex mosaic of regimes, which leads to "carbon leakage".

Voluntary Carbon Markets Unlike mandatory markets, voluntary carbon markets are not subject to government or regulatory oversight. Here, organizations voluntarily purchase carbon credits to offset their emissions. A voluntary carbon credit (VCC) is a contractual agreement between a project developer and a buyer. These markets rely on global standard registries, such as Verra and The Gold Standard, for certification and verification. VCCs can provide additional revenue and support clean energy projects. The voluntary carbon market emerged from the Kyoto Protocol (CDM) and continues under Article 6 of the Paris Agreement.

• VCC types: They are generated by projects that either avoid CO2e emissions (e.g. renewable energy), or their will remove (e.g. reforestation, CCUS). One VCC typically equals one tonne of CO2e that has been reduced, sequestered or avoided.
• Challenges of voluntary markets: The key challenge is variable quality and integrity of issued creditsInitiatives such as Integrity Counsel for the Voluntary Carbon Market (ICVCM) are trying to address these issues by developing Core Carbon Principles including “Permanence” and “No double-counting”.

"Offsetting" or "Insetting"? A company can offset emissions by purchasing external offsets or opt for “insetting,” which involves financing internal projects to eliminate or prevent emissions within one's own operations or supply chainRising VCC offset prices may lead to greater interest in insetting.

The future of carbon markets National mandatory markets are expanding and it is estimated that voluntary carbon market could grow to $250 billion by 2030 and $1.5 trillion by 2050Over time, these two markets may converge. The surest sign of the ultimate success of carbon markets will be their redundancy, which will occur when every country reaches net zero emissions. Until then, however, carbon markets are likely to play a role for many years to come. JRi