Carbon Markets Explained

Carbon Market Regulations: Compliance vs. Voluntary Markets

Carbon markets are regulated through a mix of government-mandated (compliance) programs and voluntary frameworks, with different rules for issuing, trading, and retiring carbon credits. Here’s an overview of key carbon market regulations worldwide:

1. Compliance Carbon Markets (Cap-and-Trade Systems & Carbon Taxes)

These markets are legally enforced, requiring companies to limit their emissions or buy allowances/offsets to comply.

A. European Union Emissions Trading System (EU ETS)

Largest and most established carbon market, covering over 40% of EU emissions (power, industry, aviation).
Uses a cap-and-trade system where companies must buy or receive emissions allowances (EUAs).
Carbon Border Adjustment Mechanism (CBAM) (2026) will extend carbon pricing to imported goods.

B. California Cap-and-Trade Program (U.S.)

Covers power plants, refineries, and large industrial facilities in California & Quebec (linked markets).
Includes California Carbon Offsets (CCOs) for regulated entities to meet a portion of their compliance.

C. Regional Greenhouse Gas Initiative (RGGI – U.S. Northeast)

First mandatory cap-and-trade program in the U.S. for power sector emissions.
Covers 11 U.S. states, with regular carbon credit auctions.

D. China’s National Emissions Trading System (China ETS)

World’s largest carbon market by volume, covering power generation (~40% of China’s emissions).
Expected to expand to industry and transport sectors in the coming years.

E. South Korea Emissions Trading System (K-ETS)

First cap-and-trade system in East Asia, covering power, industry, and aviation.
Includes Korean Allowance Units (KAUs) and offsets (Korean Offset Credits – KOCs).

F. Other National & Regional Compliance Markets

UK ETS – Post-Brexit version of EU ETS.
Japan’s GX-ETS – Newly launched, expanding to voluntary markets.
New Zealand ETS (NZ ETS) – Covers forestry, energy, and transport sectors.
Canada’s Federal Carbon Pricing System – Mix of carbon taxes & cap-and-trade (e.g., Ontario, Quebec).

2. Voluntary Carbon Markets (VCM)

Unlike compliance markets, voluntary markets allow companies to purchase carbon credits to offset emissions beyond regulatory requirements. Key regulations and frameworks guiding VCM include:

A. ICVCM – Integrity Council for the Voluntary Carbon Market

Sets Core Carbon Principles (CCPs) to ensure high-integrity credits for buyers.
Focuses on additionality, permanence, and transparency for voluntary carbon credits.

B. SBTi (Science Based Targets initiative) & Net-Zero Guidelines

Establishes rules for corporate carbon offsetting and net-zero claims.
Discourages over-reliance on offsets in corporate climate strategies.

C. CORSIA – Carbon Offsetting and Reduction Scheme for International Aviation

A UN-backed program requiring airlines to offset emissions above 2019 levels.
Accepts specific voluntary carbon standards (e.g., VCS, Gold Standard, ACR, GCC).

D. Article 6 of the Paris Agreement – Global Carbon Market Mechanism

Creates an international framework for carbon credit trading between countries.
Article 6.2: Enables bilateral carbon credit trades (e.g., Switzerland-Peru deal).
Article 6.4: Establishes a UN-regulated carbon market, replacing Kyoto’s Clean Development Mechanism (CDM).

E. National Carbon Credit Regulations

Many countries are developing rules to govern voluntary carbon credit sales (e.g., Brazil, Indonesia).
Aim to prevent double counting and ensure transparency in offset claims.

Emerging Trends in Carbon Market Regulations

Tighter corporate claims regulations: New EU Green Claims Directive cracks down on misleading net-zero claims.
Increased scrutiny of carbon credit quality: ICVCM and SBTi rules push for higher integrity standards.
More compliance markets linking with voluntary credits: Some cap-and-trade programs allow verified voluntary offsets (e.g., California).
Focus on biodiversity & carbon removals: New Nature Restoration & Carbon Removal credits are gaining regulatory attention.

Conclusion

Carbon markets are evolving rapidly, with compliance programs becoming stricter and voluntary markets facing stronger integrity rules. Businesses must navigate these shifting regulations to ensure compliance and avoid reputational risks.