The carbon markets are comprised of market-based instruments that put a price on emissions of greenhouse gases, thus promoting efficient climate change mitigation. There are two different approaches which lead to the creation of carbon markets: emissions trading schemes with tradeable emissions permits (allowances) and crediting mechanisms to enable issuance and the trading of carbon credits.
Emissions trading schemes set a regulatory ceiling or ‘cap’ on greenhouse gas emissions through a cap-and-trade system, such as European Union’s Emissions Trading Scheme (EU-ETS), and in the US, the California Carbon Market. These schemes can be introduced at various levels (international, national, subnational) and, depending on their design, can cover either businesses or governments.
The voluntary carbon markets function outside, but in parallel of, the compliance market. This market offers businesses, NGOs and individuals the possibility to offset emissions on a voluntary basis by purchasing carbon credits, with no intended use for compliance purposes.