Voluntary Carbon Market vs. Compliance Market
The voluntary carbon market, as its name suggests, serves as a platform where individuals and entities purchase carbon credits or offsets to mitigate their emissions. Companies engage in the voluntary carbon market for multiple reasons, varying based on their unique objectives and values. These motivations include Corporate Social Responsibility (CSR), brand enhancement, alignment with stakeholder expectations, compliance with environmental regulations, pursuit of positive social impact, and more.
Differentiating itself from the cap-and-trade systems that operate under fixed allowances or permits, the voluntary carbon market functions under a project-based framework. Here, the emphasis shifts to individual projects or initiatives aimed at emission reduction or removal.
It’s important to note that participation in this market is entirely voluntary, and it is not bound by regulatory compliance. Companies make the conscious choice to participate based on their individual motivations and commitments. While the voluntary market is notably smaller in scale compared to the compliance market, it is expected to grow further in the forthcoming years.
The compliance market operates within the framework of national, regional, or international carbon reduction regulations, adhering to a cap-and-trade system. In this system, a regulatory authority allocates or auctions a finite number of ‘allowances,’ each permitting the release of a specific volume of emissions. The primary aim of the compliance market is to meet commitments to reduce greenhouse gas emissions, aligning with international agreements such as the Kyoto Protocol and the Paris Agreement.
Notable examples include the European Union Emissions Trading System, the California Cap-and-Trade Program, the Australian Emissions Reduction Fund, the British Columbia Carbon Tax, and the New Zealand Emissions Trading Scheme. At present, the compliance market significantly surpasses the voluntary market both in terms of the emissions it encompasses and the financial value of transactions.
Voluntary vs. Compliance Market
| Voluntary Market | Compliance Market | |
|---|---|---|
| Exchanged Commodity | Carbon credits Facilitated by the project-based system | Allowances facilitated by the cap-and-trade system. |
| How is the market regulated? | Self-regulated | Regulated by national, regional, or international regimes |
| Who can purchase credits? | Individuals, companies, governments, and NGOs | Companies and governments have adopted emission limits established by the United Nations Convention on Climate change |
| Where do credits trade? | Currently no centralized voluntary carbon credit market. Project developers can sell credits directly to buyers, through a broker or an exchange, or sell to a retailer who then resells to a buyer. | Companies that surpass their emission targets can sell their surplus credits to those looking to offset emissions. Credits can be sold under the Kyoto Protocols emissions trading scheme. |
