How Does Carbon Trading Work?

Carbon Trading 101_What Is It & How Does It Work

Carbon trading is a market-based system designed to reduce the greenhouse gas emissions that contribute to global warming, especially carbon dioxide, by creating a financial incentive to do so.

But how does this market work, and where does carbon offsetting fit into the picture?

What Is The Carbon Market?

Despite being described as ‘a market’, there are in fact multiple markets for carbon trading. Carbon credits that are bought and sold in one market might not be valid in another.

The term carbon trading is most often used to describe the compliance market that exists for carbon credits within a regulated scheme, such as the European Union Emissions Trading Scheme (EU ETS), California’s greenhouse gas scheme or the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States.

These mandatory schemes require businesses whose emissions exceed a defined threshold, or who operate in specific industry sectors such as fossil fuel-fired power plants, to obtain an allowance, or credit, for each tonne of carbon dioxide equivalent that they emit annually.

Participants may receive an initial allocation of carbon credits free of charge, or enter an auction to buy them. Businesses who subsequently reduce their emissions can sell their excess carbon credits to other participants whose emissions have increased, thereby commoditizing carbon and creating a market.

Regulated carbon markets generally trade only in their own carbon allowances – although the use of carbon offsets in place of a proportion of the credits is permitted in some schemes, if they comply with strict regulatory rules.

Where Does Voluntary Carbon Offsetting Fit In?

The other type of carbon market relies on the creation of carbon offsets, which can be bought by any business, organization or individual to offset their own greenhouse gas emissions on a voluntary basis.

The buyers in the voluntary carbon market are often organizations that have already implemented carbon reduction plans to minimize emissions from their business activities as far as possible. To achieve ‘zero emissions’, carbon neutrality, or other corporate social responsibility (CSR) targets, they choose to buy carbon offsets from a scheme that has reduced or avoided emissions elsewhere.

The sellers in the voluntary carbon market are project developers who design and implement real-world carbon reduction projects in accordance with the requirements of one of the voluntary standard bodies. Each tonne of CO2 emissions avoided can be sold as a carbon offset, compensating for a tonne of CO2 emitted elsewhere.

Because the voluntary market is global and fragmented, many project developers sell offsets through a retailer or broker, who takes responsibility for promoting the offsets and finding buyers.

What’s The Benefit of Buying Offsets on The Voluntary Market?

As a mandated participant in an emissions trading scheme, there is little sustainability or CSR value to be gained from compliance actions alone.

Anyone – business, non-profit, other organization or individual – can buy voluntary carbon offsets, even if they already operate in a compulsory regulated market.

Organizations who invest in voluntary offsets can demonstrate their commitment to tackling global climate change and minimizing their own environmental impact, and are often perceived more favorably by green-minded consumers.

Furthermore, by choosing progressive offsets, such as NativeEnergy’s Help Build™projects, companies can hit social, environmental and other CSR goals at the same time, and make a real difference to the communities involved.