What Is Carbon Offset Market?

What Is Carbon Offset Market?

CO2 gas is known as the worst man caused factor for global greenhouse effect, which is an overwhelming problem for the mankind in 21-st century. However, there are certain mechanisms that help to reduce this negative effect to a certain extent, slowing down global warming processes. Carbon offset is defined as a tool that helps to reduce, avoid the release or capture of one metric ton of carbon dioxide or greenhouse gas equivalent.

Voluntary Market

The market of voluntary carbon units or voluntary offset market includes all operations aimed at compensating for carbon footprint. At the same time, these carbon units are by definition excluded from use in an actively regulated or compliance carbon market. This does not include those offsets that are acquired for resale or retirement consumption in accordance with requirements related to the neutralization of carbon dioxide or due to another environmental imperative. Both voluntary and compliance markets are primarily aimed at preventing the deterioration of the climate and overall ecological situation on our planet.

Voluntary demand for carbon offsets is formed by companies and individuals who are aware of their responsibility to neutralize their ecological footprint. Such market participants are characterized as purely voluntary buyers. They also include companies that voluntarily purchase offsets before their emission reductions are dictated by the regulator. This category of buyers neutralizes harmful emissions for a number of reasons, mainly related to corporate social responsibility, ethics and reputation.

Compliance market

The voluntary offsets market exists side by side with the compliance market driven by authorized restrictions on greenhouse gas emissions. Within the framework of compliance market, regulated entities can acquire and issue allowances or offsets in an attempt to achieve the objectives set by the regulator. This market operates on a much broader scale than the voluntary market. In the case of cap-and-trade programs, often involving both emitters and financial intermediaries both parties are allowed to trade these allowances in order to profit from unused reserves or meet regulatory requirements.

The most active carbon offsetting programs which enable going CO2 neutral are the United Nations Clean Development Mechanism (CDM), which is a source of offsets for Parties to the Kyoto Protocol and the Gold Standard by WWF. (Another popular mechanism is Emissions Trading Scheme actively regulated in the European Union.)

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