March 27, 2023 How Do Carbon Markets Reduce Emissions?

A look at how the carbon credit helps reduce emissions.

Carbon market regulation has become one of the most discussed topics in recent years. Private and public sector authorities are intensely concerned about the sustainability of their processes, that is, how their operations impact society and the environment, especially with the crisis generated by the Covid-19 pandemic and new scientific reports indicating the need to limit global warming to 2ºC.

The carbon market is not just a way to contain the advance of the greenhouse effect and its serious environmental consequences. There is an important economic impact since the purchase and sale of carbon credits through the carbon credit marketplace tend to become a significant source of income.

What is the carbon market?

Carbon market credit refers to the purchase of carbon credits by countries and companies that have exceeded their greenhouse gas (GHG) emission targets.

Governments typically establish emissions limits for hard-to-abate industries, which produce high levels of pollutants. These industries are required to adhere to the established limits. However, other companies have the option to purchase emissions credits voluntarily.If a company pollutes less than the determined limit, it can sell that difference as credit to another company that has exceeded its quota.

This buying and selling of carbon credits between companies or countries is called cap-and-trade. Each unit of these credits is equivalent to 1 ton of CO².

In this context, we arrive at the concept of carbon neutrality which involves reducing a company’s greenhouse gas emissions as much as possible, and then taking action to offset the remaining emissions by investing in carbon reduction projects, such as renewable energy or reforestation initiatives.

​​The goal of carbon neutrality is to reduce the impact of a company’s operations on the environment and help mitigate the effects of climate change.

How does the carbon credit help reduce emissions?

As already mentioned, there are several discussions about the carbon market, but there is still no consensus on how this agreement can be achieved. There are different calculations to idealize the commercialization of carbon credits.

However, carbon credits generally work as a license that a country or company obtains to release a certain volume of greenhouse gas into the atmosphere. If they exceed this limit, it is possible to buy the share of another that has not exceeded the defined limit.

There are two forms or models of carbon markets that are active worldwide: voluntary and regulated.

Regulated market

When we talk about a regulated market, we refer to mandatory reductions already defined in international agreements. Therefore, countries must follow the countries and companies  that exceeds the limit for buying carbon credits from those that emit less. Different regulated markets exist worldwide, such as California, China, and the European Union.

Voluntary market

In the case of the voluntary market, some organizations take the initiative to offset emissions generated by their industrial or business operations. In this case, they can buy credits from those extracting GHG from nature through different projects, such as renewable energy systems, reforestation, and other activities for the conservation of forests.

What is the scenario of the international carbon market?

At the international level, the trade of carbon credits already takes place in several parts of the world. Some examples are California in the United States, Quebec in Canada, and the European Union.

The California Carbon Market is one of the most prominent in the world. According to data from Californian authorities, the different local projects have already generated over 250 million carbon credits by the beginning of 2022 alone.

The EU-ETS (European Union Emissions Trading System) is the largest international carbon market. Launched in 2005, it aims to dictate rules on trading GHG emission licenses in the European Union, covering 31 countries.

In total, more than 10,000 industrial installations are part of the system, and those that exceed the emission ceiling need to buy credits from other installations.

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