What Is a Carbon Market?

2025-06-09

GHG Inventory Knowledge

Introduction

A carbon market is a system where companies trade carbon emission allowances, turning the right to emit into a financial asset. It’s a key policy tool that uses market forces to reduce greenhouse gas emissions efficiently by channeling investment toward low-cost reduction opportunities.

Two main types of carbon markets:

Compliance markets
Regulated by governments, where companies must hold enough allowances to cover their emissions. Non-compliance leads to penalties.
Used by organizations to offset emissions on a voluntary basis, often as part of carbon neutrality or ESG goals.

How a successful carbon market behaves

The primary product traded is the carbon allowance, but many systems allow partial use of carbon offsets from approved projects. In some schemes, up to 10% of compliance obligations can be met using these verified reductions.
A successful carbon market requires strong monitoring, reporting, and verification (MRV) systems, transparent pricing, and broad participation. As more countries adopt carbon pricing, carbon markets are expected to become a core part of global climate strategy, supporting the path to net-zero emissions.

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