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How Does Carbon Trading Work?

Carbon trading (or carbon trading) is market-based method created to decrease greenhouse gases that cause global warming, specifically carbon dioxide, through the creation of incentives for doing it.

However, how does this market work? And where does carbon offsets fit into the overall picture?

What is the Carbon Market?

Although it is described as a market but there are actually multiple market for trading in carbon. Carbon credits that are purchased and sold on one market may not be applicable in another.

The term”carbon trading” is typically used to refer to the compliance market for carbon credits in an approved scheme, for example, the European Union Emissions Trading Scheme (EU ETS) and California’s greenhouse gas scheme , or the Regional Greenhouse Gas Initiative (RGGI) in the northern part of the United States.

The mandatory programs require businesses that emit more than a certain threshold, or that are in certain industries, like power plants using fossil fuels to be granted an allowance which is a credit or allowance, in exchange for every ton in carbon dioxide equivalent they release annually.

Participants can receive an initial portion of carbon credits at no charge, or take part in an auction to purchase the credits. Companies that reduce their emissions are able to sell their carbon credits to others with higher emissions by commoditizing carbon and creating an market.

Regulated carbon markets typically only trade carbon credits within their carbon allowances. However, carbon offsets instead of certain credits is allowed in certain schemes, provided they are in compliance with strict rules of regulation.

Where does Voluntary Carbon Offsetting fit in?

The second type of carbon market depends on the production of carbon offsets. They are available to any organization, business or an individual to offset their carbon emissions from greenhouse gases on an non-commitment basis.

The purchasers in the market for voluntary carbon typically are companies who have already implemented carbon reduction strategies to cut down on emissions from their activities in the greatest extent possible. To meet zero emissions or carbon neutrality as well as other corporate social responsibility (CSR) goals and goals, they purchase carbon offsets through the scheme that has decreased or eliminated emissions from other sources.

The sellers of the market for voluntary carbon are project developers who create and execute real-world carbon reduction plans in accordance to the specifications that are set by one of these standard bodies that are voluntary. Every ton of CO2 emissions eliminated could be offered to offset carbon to offset a tonne of CO2 emissions elsewhere.

Since the market for voluntary offsets is fragmented and global, the majority of project developers offer offsets through a broker or retailer who is responsible to promote the offsets and locating buyers.

What is the benefit of buying offsets from the Voluntary Market?

As a participant mandated to participate of an emission trading program, there’s no sustainability or CSR value that can be derived from complying measures by themselves.

Anyone , whether a non-profit, business or other non-profit organization who wants to buy carbon offsets, regardless of whether they already have an obligatory regulated market.

Companies that make a commitment to offsets for voluntary use show their commitment to combating global climate change while reducing their environmental footprint, and are usually viewed as more environmentally conscious by consumers.

Additionally, by selecting progressive offsets, companies can meet environmental, social and other CSR objectives while doing so and also make a significant impact on the communities that are involved.