A Complete Visual Guide to Carbon Markets

A Complete Visual Guide to Carbon Markets

Carbon markets enable the trading of carbon credits, also referred to as carbon offsets.

One carbon credit is equivalent to one metric ton of greenhouse gas (GHG) emissions. Going further, carbon markets help companies offset their emissions and work towards their climate goals. But how exactly do carbon markets work?

In this infographic from Carbon Streaming Corporation, we look at the fundamentals of carbon markets and why they show significant growth potential.

What Are Carbon Markets?

For many companies, such as Microsoft, Delta, Shell and Gucci, carbon markets play an important role in offsetting their impact on the environment and meeting climate targets.

Companies buy a carbon credit, which funds a GHG reduction project such as reforestation. This allows the company to offset their GHG emissions. There are two main types of carbon markets, based on whether emission reductions are mandatory, or voluntary:

Compliance Markets:
Mandatory systems regulated by government organizations to cap emissions for specific industries.

Voluntary Carbon Markets:
Where carbon credits can be purchased by those that voluntarily want to offset their emissions.

As demand to cut emissions intensifies, voluntary carbon market volume has grown five-fold in less than five years.

Drivers of Carbon Market Demand

What factors are behind this surge in volume?

• Paris Agreement: Companies seeking alignment with these goals.
• Technological Gaps: Companies are limited by technologies that are available at scale and not cost-prohibitive.
• Time Gaps: Companies do not have the means to eliminate all emissions today.
• Shareholder Pressure: Companies are facing pressure from shareholders to address their emissions.

For these reasons, carbon markets are a useful tool in decarbonizing the global economy.

Voluntary Markets 101

To start, there are four key participants in voluntary carbon markets:

• Project Developers: Teams who design and implement carbon offset projects that generate carbon credits.
• Standards Bodies: Organizations that certify and set the criteria for carbon offsets e.g. Verra and the Gold Standard.
• Brokers: Intermediaries facilitating carbon credit transactions between buyers and project developers.
• End Buyers: Entities such as individuals or corporations looking to offset their carbon emissions through purchasing carbon credits.

Secondly, carbon offset projects fall within one of two main categories.

Avoidance / reduction projects prevent or reduce the release of carbon into the atmosphere. These may include avoided deforestation or projects that preserve biomass.

Removal / sequestration projects, on the other hand, remove carbon from the atmosphere, where projects may focus on reforestation or direct air capture.

In addition, carbon offset projects may offer co-benefits, which provide advantages that go beyond carbon reduction.

What are Co-Benefits?

When a carbon project offers co-benefits, it means that they provide features on top of carbon credits, such as environmental or economic characteristics, that may align with UN Sustainable Development Goals (SDGs).

Here are some examples of co-benefits a project may offer:

• Biodiversity: Protecting local wildlife that would otherwise be endangered through deforestation.
• Social: Promoting gender equality through supporting women in management positions and local business development.
• Economic: Creating job opportunities in local communities.
• Educational: Providing educational awareness of carbon mitigation within local areas, such as primary and secondary schools.

Often, companies are looking to buy carbon credits that make the greatest sustainable impact. Co-benefits can offer additional value that simultaneously address broader climate challenges.

Why Market Values Are Increasing

In 2021, market values in voluntary carbon markets are set to exceed $1 billion.

*As of Aug. 31, 2021
Source: Ecosystem Marketplace (Sep 2021)

Today, oil majors, banks, and airlines are active players in the market. As corporate climate targets multiply, future demand for carbon credits is projected to jump 15-fold by 2030 according to the Task Force on Scaling Voluntary Carbon Markets.

What Qualifies as a High-Quality Carbon Offset?

Here are five key criteria for examining the quality of a carbon offset:

• Additionality: Projects are unable to exist without revenue derived from carbon credits.
• Verification: Monitored, reported, and verified by a credible third-party.
• Permanence: Carbon reduction or removal will not be reversed.
• Measurability: Calculated according to scientific data through a recognized methodology.
• Avoid Leakage: An increase in emissions should not occur elsewhere, or account for any that do occur.

In fact, the road to net-zero requires a 23 gigatonne (GT) annual reduction in CO₂ emissions relative to current levels. High quality offsets can help meet this goal.

Fighting Climate Change

As the urgency to tackle global emissions accelerates, demand for carbon credits is poised to increase substantially—bringing much needed capital to innovative projects.

Not only do carbon credits fund nature-based projects, they also finance technological advancements and new innovations in carbon removal and reduction. For companies looking to reach their climate ambitions, carbon markets will continue to play a more concrete role.