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.