What is the carbon marketplace?

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.

The other is a voluntary market where businesses and individuals buy credits (of their own accord) to offset their carbon emissions.

Think of it this way: the regulatory market is mandated, while the voluntary market is optional.

When it comes to the regulatory market, each company operating under a cap-and-trade program is issued a certain number of carbon credits each year. Some of these companies produce less emissions than the number of credits they’re allotted, giving them a surplus of carbon credits.

On the flip side, some companies (particularly those with older and less efficient operations) produce more emissions than the number of credits they receive each year can cover. These businesses are looking to purchase carbon credits to offset their emissions because they must.

how an emission trading system works

Most major companies are doing their part and will or have announced a blueprint to minimize their carbon footprint. However, the amount of carbon credits allocated to them each year (which is based on each business’s size and the efficiency of their operations relative to industry benchmarks)., may not be enough to cover their needs.

Regardless of technological advances, some companies are years away from reducing their emissions substantially. Yet, they still have to keep providing goods and services in order to generate the cash they need to improve the carbon footprint of their operations.

As such, they need to find a way to offset the amount of carbon they’re already emitting.

So, when companies meet their emissions “cap,” they look towards the regulatory market to “trade” so that they can stay under that cap.

Here’s an example:

Let’s say two companies, Company 1 and Company 2, are only allowed to emit 300 tons of carbon.

However, Company 1 is on track to emit 400 tons of carbon this year, while Company 2 will only be emitting 200 tons.

To avoid a penalty comprised of fines and extra taxes, Company 1 can make up for emitting 100 extra tons of CO2e by purchasing credits from Company 2, who has extra emissions room to spare due to producing 100 tons less carbon this year than they were allowed to.

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