Carbon Markets: What They Are and How They Work
- Media Manager
- Oct 13, 2023
- 1 min read
Invetsopedia
Written By: Greg Daughtry
Published: October 13th, 2023
What Are Carbon Markets?
A carbon market is a specialized type of financial market, through which carbon credits can be bought and sold. Carbon credits are essentially permits that allow the purchaser to emit a certain amount of carbon dioxide or other greenhouse gas. Some carbon markets are run and regulated by governments or international bodies, with certain industries required to participate, while others are entirely voluntary.
How Carbon Markets Work
Carbon markets are a key element of cap and trade programs intended to reduce greenhouse gas emissions. In a cap and trade program, also known as an emissions trading system (ETS), governments or groups of governments cap emissions at a certain overall level and assign limits to entities, such as countries or companies, covered under the rules. An entity that doesn't need to use all of the carbon credits it has been issued can sell them to one that expects to exceed its limits.
In addition, entities can create carbon credits, or offsets, either by reducing or removing carbon dioxide, that they can then sell. Reduction refers to initiatives that serve to lower emissions, such as adding solar panels or building a wind farm, while removal refers to projects that remove and then store carbon dioxide, such as through reforestation or sophisticated carbon capture technology.
