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Carbon Trading 101

Carbon trading can be described as a market-based method that is designed to cut down on greenhouse gases that cause global warming, specifically carbon dioxide, through the creation of incentives for doing it.

How does the market work? And where does carbon offsets fit into the overall picture?

What is the Carbon Market?

Although it is described as a market however, there are actually many marketplaces for trading carbon. Carbon credits bought and sold in one marketplace may not be applicable in another.

The term”carbon trading” commonly used to refer to the compliance market for carbon credits in the framework of a controlled scheme, like the European Union Emissions Trading Scheme (EU ETS) as well as California’s greenhouse gas program or the Regional Greenhouse Gas Initiative (RGGI) in the northern part of the United States.

These mandated schemes require companies that emit more than a certain threshold, or that are in certain industries, like power plants using fossil fuels to receive an allowance, in the form of credit for every one tonne in carbon dioxide equivalent they emit each year.

Participants can get an initial portion of carbon credits for free cost, or participate in an auction to purchase the credits. Businesses that later reduce their emissions are able to sell the excess carbon credits to others with higher emissions which will result in carbon being commoditized and creating markets.

Regulated carbon markets typically are only trading with their own carbon allowances. However, carbon offsets instead of certain credits is permissible in certain schemes, provided that they comply with strict rules of regulation.

Where Do Voluntary Carbon Offsettings Fit in?

The second kind of carbon market is based on the production of carbon offsets. These can be purchased by any company, organization, or person to offset their emission of greenhouse gases, on a non-commitment basis.

The buyers of the market for voluntary carbon usually are businesses who have already put in place plans for carbon reduction to reduce the emissions of their business operations in the greatest extent possible. To reach zero emissions carbon neutrality, zero emissions, as well as other corporate social responsibility (CSR) goals and goals, they purchase carbon offsets through an initiative that has cut or eliminated emissions from other sources.

The sellers of the market for voluntary carbon are project developers who create and implement carbon reduction plans in accordance with the standards that are set by one of these standard bodies that are voluntary. Every carbon offset of a tonne could be offered in the form of a carbon offset which compensates for a ton of CO2 that is emitted elsewhere.

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Since the market for voluntary offsets is global and fragmented most project developers sell offsets through a broker or retailer who is responsible in promoting offsets and locating buyers.

What’s the Benefit of Buying offsets on the Voluntary Market?

As a participant mandated to participate within an ETS scheme there’s very little CSR or sustainability in compliance measures on their own.

Any business, non-profit or any other type of organization is able to purchase voluntary carbon offsets, regardless of whether they already have the market that is regulated and compulsory.

Companies that make a commitment to offsets for voluntary use are able to demonstrate their commitment to combating global climate change while reducing their environmental footprint, and are usually viewed as more environmentally conscious by consumers.

Additionally, by selecting progressive offsets, companies can meet social, environmental , and other CSR objectives while doing so and also make a significant impact on the communities they serve.