Carbon markets emerge when market-based instruments take hold and trading of carbon emission certificates begins. Market-based instruments put a price on emissions of climate-damaging greenhouse gases, thus promoting efficient climate change mitigation. There are basically two different approaches which lead to the creation of carbon markets: emissions trading schemes and crediting mechanisms.
An emissions trading scheme (cap-and-trade system) sets a regulatory ceiling or ‘cap’ on greenhouse gas emissions being regulated under the scheme. Within the sectors covered by the scheme, only a limited quantity of emission permits (allowances) are issued, namely just enough to allow the reduction target to be met. Each business covered by the emissions trading scheme must possess an allowance for each tonne of CO2e they emit. These allowances can also be freely traded. This allows participants in the scheme to buy additional allowances or, if they have succeeded in reducing their own emissions, to sell excess allowances they no longer need. This gives rise to a uniform carbon price, which in turn serves as an important market signal. The price depends largely on the level of ambition applied when setting the upper ceiling of the emissions trading scheme and on the costs incurred in implementing the emission reduction measures.
A crediting mechanism (a baseline and credit system) enables remuneration of achieved emission reductions. With this type of mechanism, tradable certificates are issued for actual emission reductions achieved. Certificates are issued when actual emissions are verifiably reduced below a predetermined baseline. A crediting mechanism can either be based on individual climate change mitigation projects and programmes, or be designed to cover entire industries or industry sectors. Participation in a crediting mechanism is voluntary and demand for generated certificates must thus be created elsewhere. This can be done, for example, by allowing the certificates generated under the crediting mechanism to be traded in an emissions trading scheme.
Emissions trading schemes can be introduced at various levels (international, national, subnational) and, depending on their design, can cover either businesses or governments. Under the Kyoto Protocol, an international emissions trading scheme was created in which national governments participated in certificates trading. more
The at times extremely difficult situation in the global carbon market has not resulted in carbon pricing instruments becoming less attractive at national level. On the contrary. Even in the run up to the Paris climate conference, when the global carbon market was laden with uncertainty, an increasing number of countries and regions planned to introduce their own emissions trading schemes or already had them in place. more
Although all Parties to the Paris Agreement have agreed to operate ambitious climate change policies, emissions from international aviation – which are not covered by the Agreement – continue to rise. The International Civil Aviation Authority (ICAO) has set itself the goal of stabilising net emissions from the aviation sector from 2020 onwards. more
In addition to the compliance market, meaning the market whose demand is fed by the binding emission reduction targets of the industrialised countries, a market for voluntary offsetting of greenhouse gas emissions has also developed in recent years. This newer market enables businesses and individuals to reduce their carbon footprint voluntarily. more