Voluntary vs. Compliance Markets
Learn the nuances of the two carbon markets.
The term "carbon markets" usually refers to the combination of voluntary and compliance markets.
Businesses, NGOs, and other organizations use voluntary carbon markets to offset emissions or support projects that reduce emissions. The choice is theirs to participate in the markets.
Governments create compliance markets to help industries meet their emissions reduction targets. They require businesses to trade carbon credits to stay within their target.
(Note: Carbon credits and carbon offsets are separate but related concepts.)
The VCM operates on the independent desire to stop the climate crisis. It allows institutions and individuals to compensate for their emissions and support projects helping the climate.
As of summer 2022, the VCM has channeled more than $5 billion into projects around the world.
Large buyers of offsets want to create a long-term financial strategy, meet sustainability goals, or improve their reputation. These motivations provide demand for offsets. The money they spend on offsets goes back to the projects that helped the climate, allowing them to fund future projects to help the environment even more.
Compliance markets involve governments and the issuance of carbon credits. These markets are large in scale and usually have a specific purpose, such as reducing emissions by a certain year or for a particular industry.
The majority of compliance carbon markets use the “cap-and-trade” system.
In cap-and-trade markets, the government limits the number of emissions a company is allowed in a particular industry. For instance, the oil industry may be entitled to emit more than the cupcake industry since emissions are more integral to one business than the other.
If a firm goes over the permitted level, it’s required to buy enough carbon credits to make up for the difference. If a firm is under the permitted level, it can sell the remaining unused credits to firms that are over the limit.
This model incentivizes companies to change their operations to be sustainable by making businesses pay the price for polluting. However, compliance markets do not directly remove harmful emissions.
Comparing the Impact
Both markets help the environment in different ways.
The compliance market follows limitations set by the government. Over the long term, this system pushes companies to turn their operations sustainable. However, this model relies on the opinion of governments, who have historically been terrible at creating meaningful ways to help fight the climate crisis.
To hold off the worst effects of the climate crisis, we need solutions that can reduce emissions in the short term while also creating long-term financial incentives. By driving money to projects that produce tangible, specific emissions that have been avoided or captured, the VCM provides the immediate positive climate action that the world needs.
If you’re interested in joining the action, consider subscribing below or offsetting your emissions here.