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The Carbon Offsets Market – How it Functions

carbon offsets market

The United Nations has issued a dire warning: with a 2.7°C increase in global temperatures potentially on the horizon, our planet could be in real trouble unless we take immediate action to reduce global emissions.

It’s not just governments, and large corporations that need to take action—ecommerce and brick-and-mortar stores also have a crucial role in achieving a carbon-neutral future.

Enter the carbon offsets market, a tool helping to reduce greenhouse gas emissions.

But what exactly is the carbon offsets market, and how does it work? Let’s find out.

What are Carbon Offset Credits?

Businesses or governmental bodies purchase carbon offset credits to compensate for the greenhouse gas emissions (GHGs) they produce through their operations and activities, such as the impact of ecommerce practices, including energy use, packaging, and transportation.

So what is a carbon offset credit?

A carbon offset credit represents a reduction of one metric ton of carbon dioxide or its equivalent (tCO2e) in other greenhouse gases achieved through the implementation of certified offset projects. These projects, which may include renewable energy projects, emissions reduction initiatives, and reforestation projects, offset the emission of climate change-driving greenhouse gas emissions into the atmosphere.

Who Regulates Carbon Offset Credits?

The demand for carbon credits is expected to skyrocket in the coming years, with estimates projecting a potential increase of 15 times current levels by 2030 and up to 100 times current levels by 2050. This growth could result in a carbon credits market worth a staggering $50 billion in 2030 alone. Diving a few more numbers, by 2050, demand for carbon credits is estimated to reach a whopping 7 to 13 gigatons of carbon dioxide per year, according to estimates. That’s a significant increase from the current annual demand of 1.5 to 2 gigatons of CO2.

With this growth potential, the carbon offset market is regulated to ensure transparency, quality, and fairness. Private organizations like Verra, the Gold Standard, Climate Action Reserve, and the American Carbon Registry employ strict standards to certify and verify carbon offset projects and credits.

While local, federal, and international governments oversee carbon offset programs by working alongside international carbon markets, including the European Union Emissions Trading System (EU ETS) or the Clean Development Mechanism (CDM) under the United Nations Framework Convention on Climate Change (UNFCCC).

These private and public organizations don’t just verify and certify offset projects and credits; they also oversee carbon offset market prices.

Often referred to as carbon pricing, the policies implemented to regulate carbon offset market price involve assigning a monetary value to carbon emissions and a financial cost to polluting activities. These policies help to internalize the negative externalities of carbon emissions and encourage companies to reduce their carbon output.

carbon offsets market

The Different Carbon Offset Markets

There are two carbon offset markets: the voluntary vs. compliance carbon markets.

The Global Carbon Offset Market

The global carbon offset market, also known as the compliance carbon market, is used for trading carbon offsets that meet mandatory emission reduction targets set by the organizations and governmental bodies we just discussed.

Carbon offset credits traded on the compliance market are required to meet offset obligations and emission compliance criteria, often set by international agreements, to be considered valid and eligible for use towards meeting emission reduction targets. 

These standards and benchmarks vary depending on the specific regulatory framework. Generally, they include requirements around the types of projects that generate offsets, the methods used to calculate and verify real emissions reductions, and the transparency and reporting of offset transactions.

The Voluntary Carbon Offset Market

The carbon credit voluntary market is a platform for voluntary carbon offsets purchased by businesses to offset their carbon emissions or support projects that reduce greenhouse gas emissions. These offsets are not required by law or regulation. Instead, businesses purchase these voluntary carbon offsets to reduce their environmental impact.

Why would businesses “opt into” such an initiative?

As the carbon offset market size continues to grow, the voluntary carbon market, while not mandatory, is becoming an increasingly important player in reducing the impacts of greenhouse gas emissions globally. This is partly due to businesses aligning with consumer demand and acting out of a desire to do good.

The downside?

Unlike compliance markets, voluntary carbon markets are not regulated by governments or international organizations. As a result, the carbon offset credits traded on this market may vary in quality and reliability. Because of this, skeptics often argue that it can be challenging to ensure that carbon offset credits sold on voluntary markets are being used to fund genuine, high-quality projects.

Some carbon credit voluntary carbon markets have addressed these concerns by establishing third-party certification programs that verify the quality and reliability of carbon offset credits. 

Many refer to these as major carbon standards.

EcoCart’s offset projects fall under this category. Our carbon offset projects are verified and certified by the American Carbon Registry, Climate Action Reserve, Gold Standard, and Verra.

The Biggest Buyers and Sellers of Carbon Offsets

The biggest buyers and sellers of carbon offsets depend on the specific carbon offset market. For example, within the compliance market, the biggest buyers are often governments or large corporations that purchase carbon credits to meet mandatory emission reduction targets set by international agreements or national laws. The biggest sellers in the compliance market are typically large-scale carbon offsets projects, such as renewable energy projects or reforestation initiatives, that have been certified and verified by third-party organizations.

In the voluntary carbon offset market, the biggest buyers are often individuals and small to medium-sized businesses looking to offset their carbon emissions or support projects that reduce greenhouse gas emissions. The biggest sellers in this market are often similar to those in the compliance market. While they also include smaller-scale projects or initiatives that have yet to be certified or verified by third-party organizations.

Top Carbon Offset Companies

In case you’re wondering how to invest in carbon credits, some of the leading companies in the carbon offset industry offering carbon offset services include:

3Degrees

3Degrees is widely regarded as one of the top carbon offset companies due to its focus on working with businesses and utilities, its industry-specific projects, and its dedication to sustainability. The company also offers various services related to decarbonization, renewable energy, and sustainability consulting.

Carbon Conscious Investments LTD

Carbon Conscious Investments LTD is a company based in Western Australia that holds carbon property rights on 30 farms in the state’s wheat belt region. The company is involved in large-scale projects that generate Australian Carbon Credit Units and are registered by the Clean Energy Regulator.

Native Energy

Native Energy is a well-respected carbon offset company that provides businesses with various offset project options, including carbon emission calculators. Native Energy is also known for its commitment to ensuring the genuine impact of its carbon offset projects in reducing greenhouse gas emissions.

Sterling Planet

Sterling Planet is a carbon offset company accredited in the US for developing green power projects and supporting clean energy generators. Sterling Planet’s carbon offset initiatives aim to reduce greenhouse gas emissions caused by energy use and transportation in the American community.

Terrapass

Since its founding, Terrapass has expanded its portfolio to include a range of sectors, including air travel and energy consumption, and helped over 1,000 businesses, institutions, and hundreds of individuals offset their carbon emissions.

What Is The Voluntary Carbon Market?

The voluntary carbon market, which operates independently of the government-mandated compliance market, allows the trading of carbon offsets purchased voluntarily by businesses and individuals to offset their carbon emissions or support projects that reduce greenhouse gas emissions. These offsets are not required by law or regulation but are chosen by businesses or even individuals to reduce their environmental impact.

Where Are Carbon Credits Traded?

Carbon credits can be traded on various carbon offset markets, both domestic and international. The world’s largest carbon offset markets where carbon credits are traded include:

Australian Carbon Credit Units (ACCUs)

Australian Carbon Credit Units (ACCUs) are carbon credits bought and sold on the Australian carbon offset market. Companies can use these credits to offset their carbon emissions or achieve mandatory carbon reduction goals set by the Australian government.

California Carbon Allowance Auction

The California Carbon Allowance Auction is a government-regulated carbon offset market in the state that was created as part of the state’s cap-and-trade program. Companies participating in this program can offset their carbon emissions by purchasing credits from offset projects through the auction. These credits can be used to meet the mandatory emission reduction targets set by the California carbon offset program.

Chicago Climate Exchange (CCX)

The Chicago Climate Exchange (CCX) was created as a voluntary carbon offset market in the United States. Companies participating in the CCX trade carbon offsets buy and sell carbon credits to offset their emissions or support emissions reduction projects.

Chicago Climate Futures Exchange (CCFE)

The CCFE allows businesses to offset their carbon emissions by buying carbon credits that represent reductions in greenhouse gases made by offset projects. These credits can be used to offset current emissions or to invest in reducing future emissions.

China’s New Emissions Trading System (ETS)

China launched its national carbon market, known as the emissions trading scheme (ETS), in 2021, covering over 2,000 large emitters in the power sector. The ETS includes the China Certified Emissions Reductions (CCER) program, which allows companies to voluntarily reduce their emissions through certified projects such as renewable energy, forestry, and waste-to-energy initiatives.

European Union Emissions Trading System (EU ETS)

The European Union Emissions Trading System (EU ETS) is one of the largest carbon markets in the world, covering over 11,000 power plants and manufacturing facilities in 30 countries. The EU ETS operates as a compliance market, meaning that companies must meet mandatory emission reduction targets set by the European Union.

Regional Greenhouse Gas Initiative (RGGI)

The Regional Greenhouse Gas Initiative (RGGI) is a northeastern United States compliance market. The RGGI covers the electricity sector in nine states and requires participating power plants to reduce their carbon emissions.

Tokyo Commodity Exchange (TOCOM)

The Tokyo Commodity Exchange (TOCOM) is a market in Japan that allows companies to achieve carbon reductions required by federal law. These credits represent measurable, verified reductions in greenhouse gas emissions, which can help businesses achieve their carbon reduction goals.

Western Climate Initiative (WCI)

The Western Climate Initiative (WCI) is a compliance market established in the western United States. The WCI covers seven states’ electricity and transportation sectors and requires participating companies to reduce carbon emissions.

What Is The Purpose Of Carbon Offset Credits?

Through carbon offset credits, businesses can compensate for their carbon emissions by investing in projects that reduce or remove greenhouse gases emitted into the planet’s atmosphere. Carbon offset credits can be used to offset the carbon emissions associated with activities such as air travel, energy use, or the production of goods and services. Purchasing carbon offset credits allows individuals and businesses to mitigate the adverse effects of climate change and support the development of low-carbon technologies and practices.

Carbon offset credits are often used to meet mandatory emission reduction targets set by governments or international agreements or as a voluntary means of offsetting emissions.

The benefits these initiatives bring about aren’t just limited to the environment. Carbon offset projects also bring social and economic benefits to the communities where they are implemented. For example, reforestation projects can provide employment and income opportunities, while renewable energy projects can improve energy security and reduce reliance on fossil fuels.

Conclusion: Take the Initiative by Combating Climate Change

Navigating the carbon offset market can be challenging, but your business can significantly impact sustainability with the right partner.

So why wait?

Take control of your carbon footprint with our easy-to-use footprint dashboard by requesting a demo now and joining the ranks of eco-conscious ecommerce businesses leading the charge in emissions reduction.

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