Global warming easily tops the list of defining issues of our age. Now, more than ever, the world is confronting the fact that, climate change is possibly the greatest threat to human existence. As a result, organizations globally are now focused on the environmental, social and governance aspects of business in addition to the traditional role of driving shareholder value. One of the biggest contributors to global warming are the greenhouse gas emissions from our day to day human activities. It is on that note that it is important to discuss about carbon emissions trading. Carbon emissions trading refers to a cap and trade regulatory programme designed to limit carbon emissions resulting from industrial activities. The carbon markets are divided into compliance and voluntary markets.
The compliance market is regulated by national and international authorities who determine a cap in the amount certain sectors can release into the environment in order to achieve their Nationally Determined Contributions (NDC) under Article 4 of the Paris Climate Agreement. The authorities track the carbon footprints for entities and determine if their emissions went beyond the allowable limit. Entities that go beyond the prescribed amount in carbon emissions have no option but to buy or use saved credits to stay below the emissions limit. For proper context, a carbon credit is a tradeable instrument which represents one tonne of carbon dioxide removed from the environment.
In the voluntary market, carbon credits trade is on voluntary basis meaning that the participants operate outside the compliance markets. This provides a flexible trading scheme for players (individuals, businesses, governments and NGOs) to voluntarily offset their emissions by purchasing carbon credits. The major difference between the voluntary carbon market (VCM) and compliance markets is the ability to participate in VCM regardless of the participant’s geographical location or business factor.
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