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Carbon Markets 101:

What is a Carbon Market?

 

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A carbon market allows investors and corporations to trade both carbon credits and carbon offsets simultaneously. This mitigates the environmental crisis, while also creating new market opportunities.

Carbon offsets are most known as tools in regulated markets where organizations are legally compelled to comply with emission limits. The Kyoto Protocol, EU Emissions Trading System, and California cap-and-trade programs were the first large-scale regulated markets, but now there are many others all over the world.

When it comes to the sale of carbon credits within the carbon marketplace, there are two significant, separate markets to choose from.

One is a regulated market, set by “cap-and-trade” regulations at the regional and state levels. In regulated markets, carbon credits often play a significant role since in theory, they provide an efficient means to reduce emissions across organizations and nations.

The other is a voluntary market where businesses and individuals buy credits (of their own accord) to offset their carbon emissions. In voluntary markets, emissions reductions are driven not by legal requirements but by other factors:

  • Investors who require environmental awareness and action in the companies they invest in
  • Consumers preferring products from companies with a lower greenhouse gas footprint
  • The marketing advantages of offering products that are more “green” than those from competing companies, etc.

A company that is not legally bound to reduce its emissions might still seek to reduce its emissions to entice investors or make its products more appealing to environmentally conscious consumers. In the mid 2010s, it was hypothesized that corporate sustainability goals could help business. These hypotheses have since been proven.

Forbes outlines 6 ways in which corporate sustainability helps business. These include creating additional brand value and competitive advantage, especially as more than 65% of consumers have demonstrated willingness to pay more for similar, sustainably produced products. 

Harvard Business Review has performed even deeper analysis and found that incorporating sustainability and regeneration into business decreases risk, improves financial performance and fosters innovation. Such companies will face the same insetting vs. offsetting options as a company in a regulated market. But lately, organizations looking to reduce their emissions voluntarily are being called upon to achieve reductions without the use of offsets.

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