Carbon Markets - Understanding the Basics

Part 1 of a series on nature-based markets, their impacts on the environment, and their implications for various global actors.

Oct 30, 2023

Globally, there is a consensus that man-made impacts on the environment need to be greatly reduced to protect both the natural world and our way of life. Ahead of COP28, governments, scientists, policy makers, thinktanks, businesses, and NGOs are looking at creative solutions for two key areas: 1) minimizing impacts of industries which take longer to transition to sustainable practices and 2) innovative ways to promote protection of native areas. Some proposed solutions include the creation of carbon credit markets or similar projects such as the REDD+ framework. Programs of this kind will be useful for global actors, especially in the Global South, but are not sufficient alone for mitigating man-made climate change impacts.

One way to think of carbon credits are as tickets that allow the ticket holder the ability to offset their carbon emissions. The tickets are either generated through government programs or through voluntary projects (typically by NGOs or private entities). In both cases, the tickets represent actions which capture or otherwise negate a set amount of greenhouse gas emissions. Generally these tickets can be utilized by industries or companies that cannot reduce or stop their emissions quickly enough for net-zero emissions goals they’ve set or that have been set locally/globally.

Governmental carbon credit programs function mainly through a cap-and-trade method where companies are limited in the amount of greenhouse gas (GHG) emissions they are allowed to emit for a set period, and anything beyond that requires them to purchase additional tickets. In the case of a company having excess tickets which they don’t need to use to cover their GHG emissions, they are allowed to sell them through the market to those companies who require additional tickets. The goal of these types of programs is to incentivize reduction of GHG emissions through higher costs when going beyond set limits or additional income in the event of having excess tickets to sell.

For voluntary carbon offset projects, the structure of the market is defined by the entities who are creating it. Typically, the governing body for the specific carbon credit system will generate tickets based on activities or projects which are capturing GHG emissions and their scale. These tickets can then be sold by those undertaking the projects, leading to additional funding sources for environmental projects. Those purchasing the tickets may be companies that want to offset their emissions, similar to the governmental programs, or other interested parties.

Carbon credits have led to some positive environmental impacts by encouraging transformation in the way that countries view their natural reserves and discouraging practices that produce large GHG emissions in the agriculture, trade/consumables, and natural gas industries. An example of a market producing favorable results is the the Acid Rain Program (part of the Clean Air Act Amendments of 1990). It is considered the first cap-and-trade program developed by the United States, and it helped to greatly reduce sulfur dioxide emissions from coal-fired power plants through strict regulation of emissions, combined with some flexibility since it is market based. This program is seen as being widely successful due to the changes that were adopted by power plants, leading to greatly reduced pollution and emissions.

While they appear promising, especially when looking at earlier success stories, many large commercial agricultural, natural gas, and consumables/trade companies are using the purchase of extra credits regularly therefore avoiding having to change their practices to reduce their emissions. While over time this may somewhat negatively impact their bottom-line, skeptics point out that it is not seemingly a large enough deterrent to cause them to innovate on their practices in the near-term. There have also been cases where the credits have been created without actual sequestration that they are meant to represent or through abatement of deforestation which wasn’t at risk of occurring. These types of markets have been around for many years in different variations without leading to the level of rapid change required for us to reach climate goals.

For nature-based markets, there are many questions regarding regulations, verification of GHG capturing, who benefits, and whether they’re actually bringing us closer to net-zero emissions. It is highly plausible that, in combination with other policies and mandates, the efficacy of such markets to create positive environmental impact would be greatly increased. In the next part of this series, we will take a closer look at specific examples of nature-based markets so that we can get a better understanding of their influence on the environment and their realized impact for different global actors.

Thank you for reading! Please leave a comment below if you have any questions, suggestions, or something you’d like to share.

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