Ecopedia · Carbon markets · Explainer

The types of carbon markets, explained

Every carbon market trades the same thing: the right to emit, or proof of not emitting, one tonne of carbon dioxide equivalent. What differs is who sets the rules, who has to buy, and where the units come from. Switch between the four models in the figure to see how each one works.

Elizabeth VasiutaEcologist

Published 9 October 20267 min read

Figure 1 / Four ways to put a price on carbon

Compliance market

Cap-and-trade

Who has to take part
Where you see it

Figure 1 Simplified models. Bars show each emitter's emissions in blocks of tonnes; pink blocks are tradeable units (allowances or credits). Real schemes add rules on banking, price limits and offset limits.

One tonne, one unit

Carbon markets put a price on greenhouse gas emissions so that cutting them pays. The unit is almost always one tonne of carbon dioxide equivalent (t CO₂-e), which lets methane, nitrous oxide and other gases be counted on one scale. Some units are permits to emit a tonne. Others are certificates showing that a tonne was avoided or removed from the atmosphere. That difference is the first thing to check whenever you see the word "carbon credit".

Compliance and voluntary markets

The biggest split is about who makes people buy.

Compliance markets

Created by law. Covered companies must hold units for their emissions or pay penalties. Governments set the rules, the caps or baselines, and which offsets count.

Examples: EU Emissions Trading System, China's national ETS, Australia's Safeguard Mechanism.

Voluntary markets

Driven by choice. Companies, events and individuals buy credits to meet their own climate targets or to make claims such as "carbon neutral". Private standards set the rules.

Examples: credits certified by Verra or Gold Standard, Australian ACCUs bought by private companies.

The two overlap. In Australia, the same ACCU can be bought by the government, by an industrial facility to meet its legal obligation, or by a company acting voluntarily.

Cap-and-trade

A government sets a total limit, the cap, on emissions from a group of companies and issues that many allowances. Companies that cut emissions cheaply can sell spare allowances to those that find it expensive. The cap shrinks over time, so allowances get scarcer. The EU Emissions Trading System, running since 2005, is the best-known example, and China launched a national system for power generators in 2021.

Baseline-and-credit

Here there is no single cap. Each facility gets its own baseline. Beat it and you earn credits; exceed it and you must surrender credits to cover the gap. Australia's Safeguard Mechanism works this way. It covers facilities emitting more than 100,000 t CO₂-e a year, and their baselines typically fall by 4.9% each year. A facility that goes below its baseline earns Safeguard Mechanism Credits (SMCs), one per tonne, which it can keep, sell or use. In 2024–25 the scheme covered 208 facilities and 29.9% of Australia's emissions.

Offset credits

Offset credits come from projects outside the covered group: planting trees, protecting native vegetation, capturing landfill gas, better savanna burning. Each verified tonne avoided or removed becomes a credit that someone else can buy. In Australia these are Australian Carbon Credit Units (ACCUs), one per tonne, bought by the government, by Safeguard facilities and by private buyers. Internationally, voluntary credits are certified by standards such as Verra and Gold Standard.

Quality is the hard part. A credit only means something if the reduction would not have happened anyway, is measured properly and lasts. To help buyers, the Integrity Council for the Voluntary Carbon Market set Core Carbon Principles and approved the first credits carrying its label in June 2024.

Carbon taxes, for comparison

A carbon tax is not a market, but it is the main alternative. The government fixes the price per tonne and lets the amount of emissions adjust. A cap-and-trade system does the opposite: it fixes the amount and lets the price adjust. Many countries use both tools for different sectors.

Credits are not all alike

Within offsets, two questions sort most credits: does the project avoid emissions or remove carbon already in the air, and does it rely on nature or technology?

Nature-basedTechnology-based

AvoidanceProtecting forests or native vegetation at risk of clearing; better savanna fire managementCapturing landfill or coal-mine methane; efficient cookstoves; switching to renewable power

RemovalReforestation; soil carbon; restoring mangroves and seagrass (blue carbon)Direct air capture with storage; biochar; enhanced rock weathering

Removal credits usually sell at a higher price, because they take carbon out of the atmosphere rather than slowing how fast it is added.

Between countries: Article 6

Article 6 of the Paris Agreement lets countries count emission cuts made abroad. Under Article 6.2, governments trade reductions directly with each other. Article 6.4 creates a UN-run crediting mechanism, the Paris Agreement Crediting Mechanism, which approved its first credits on 26 February 2026 for a clean-cooking project in Myanmar.

The big picture

According to the World Bank, 80 carbon pricing instruments, taxes and trading systems combined, were operating in 2025, covering about 28% of global emissions. They raised more than US$100 billion for public budgets in 2024. Emissions trading systems make up most of the new and planned instruments.

Quick glossaryAllowance: a permit to emit one tonne inside a capped system. Credit: a certificate for one tonne avoided or removed. ACCU: Australia's carbon credit unit. SMC: a credit earned by beating a Safeguard baseline. Surrender: handing units to the regulator to cover emissions; surrendered units are cancelled.

Sources

This article is general information, not financial or legal advice.