Carbon Market Watch

For fair and effective climate protection.

Learn about Carbon Markets

Carbon markets aim to keep overall costs of reducing emissions as low as possible. There are two main types of carbon markets: cap-and-trade systems and offsetting mechanisms.

In a cap-and-trade system, an overall emissions cap is set, for example 20% below 1990 emissions. Countries or companies are given emission allowances that correspond with that emissions cap. Each allowance allows them to emit one tonne of CO2e. Covered entities a must meet their targets within by:

  • Reducing their own emissions
  • Trading emissions allowances with countries that have a surplus of allowances
  • Meeting their targets by purchasing carbon credits.

The largest cap-and-trade system to date is the EU-ETS.

Offsetting mechanisms do not set a cap. For each offset project that reduces emissions, offset credits are issued. These can then be sold for compliance to entities that are covered under a cap-and-trade system. The Kyoto Protocol established two offsetting mechanisms, the so-called ‘Flexible Mechanisms’: the Clean Development Mechanism (CDM) and Joint Implementation (JI).

 

Here is a short documentary that glimpses into the collapsing carbon markets from the vantage of some of the leading architects and designers of climate finance.