Despite the diverse rules, both markets intend to reduce global greenhouse gasses
One of the mechanisms created to address the climate crisis is the carbon markets, which includes the compliance and voluntary categories. The main difference between the two lies in the obligatory nature and legal support. While the compliance market involves mandatory emission reduction goals set by governments and legislations, the voluntary market is driven by companies that choose to offset emissions on their own accord, purchasing credits created by carbon projects.
In this article, we explain how both models work, highlighting the essential role that they play in reducing global greenhouse gas emission and their contribution to limiting the average rise in Earth’s surface temperature.
Compliance Market: A Government Commitment
The compliance carbon market is a public policy for emission reduction, normally established by regulations. By capping their country’s emissions, countries aim to meet internationally established commitments, like the Nationally Determined Contributions (NDCs) of the Paris Agreement.
The compliance market operates in two ways: establishing taxes on carbon emissions or through Emission Trading Systems (ETS). The latter can function as cap-and-trade or baseline-and-credit systems.
The cap-and-trade model is the main category. In it, regulated economic sectors must comply with an emissions cap though what are called emission allowances, which are the assets in this type of market.
Voluntary Market: An Alternative for the Pioneers of Decarbonization
The voluntary carbon market emerged at the end of the 1990s due to efforts by the private sector. The market is composed of organizations and individuals that see it as an opportunity to offset their emissions voluntarily, driven mostly by net-zero commitments, concern about the environment and climate, desire to increase environmental responsibility, improve corporate reputations, and meet stakeholder demands.
In this market, products follow specific methodologies to create carbon credits. “Participants buy credits to offset their emissions through projects that reduce or remove greenhouse gasses from the atmosphere, through initiatives such as forest restoration,” affirms our Carbon Policy Consultant, André Escada. He explains that the basic unit of a carbon credit is equivalent to one metric ton of carbon dioxide (tCO2eq) and that these credits can be traded in both national and international markets.
Unlike the compliance market, there isn’t an obligatory emissions cap. Nevertheless, to ensure the integrity and quality of initiatives, it’s necessary for the credits to be emitted by independent certifiers who have no ties to the project developers.
It is also mandatory that the credits undergo independent audits that conduct an analysis of the benefits of the project.
Opportunities For The Future
The voluntary market is growing rapidly, driven by the growing number of companies setting emission reduction goals. Escada reminds us that the segment is also appealing to sectors that have potential for developing emission reduction or removal projects, like agribusiness.
Additionally, there is a possibility for an intersection between the two markets, given that carbon credits can be used in compliance markets in certain jurisdictions.
“The voluntary market opens a window for opportunities, especially for the ecological restoration industry, given that the trade of credits serves as a source of funding for restoration projects in different biomes,” affirms Escada.
This is the focus of Biomas’ work. We finance our ecosystem restoration activities via the sale of high quality carbon credits. This mechanism allows for biodiversity protection, without disregarding social transformation in communities, which is one of the principal pillars of our mission.