# A primer on carbon markets

By [0xsaraf](https://paragraph.com/@0xsaraf) · 2022-05-24

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Carbon markets can be either regulated (enforced through national or international regulations) or voluntary (voluntary efforts by individuals or institutions). Irrespective, the carbon offsets are always quantified and issued under recognized standard methodologies (e.g., Clean Development Mechanism or CDM, Verified Carbon Standard or VCS). These protocols ensure transparency in the issuance process, better quality offsets and traceability. [In 2021, 21.5% of the global GHG emissions were covered by carbon pricing instruments](https://openknowledge.worldbank.org/handle/10986/35620). The instruments include carbon taxes and emission trading schemes.

Carbon markets will help finance technology solutions that will play a crucial role in limiting the global temperature rise to 1.5**°**C. With a carbon budget of 570 GtCO2e distributed across 2018 to 2050 there is a 66% chance of meeting this scenario. [By 2030 we would need to reduce the total emissions by 23 GtCO2e (Gigaton of carbon dioxide equivalent) compared to the business-as-usual emissions](https://www.iif.com/Portals/1/Files/TSVCM_Report.pdf). And by 2050, in order to reach net-zero levels, all the remaining emissions will need to be removed or sequestered. To meet this scale of ambition a combination of emission reductions and removals will be needed.

1.5°C pathway emissions

The offset market consists of international, national (or domestic) and voluntary (or independent) mechanisms. The national and international markets are regulated by Governments, while voluntary markets are not. The market is dominated by activity from voluntary standards.

Offset issuance and number of projects registered by mechanism

**Regulated Markets**

The regulated offset markets consist of domestic crediting regimes as well as multilateral mechanisms (such as the erstwhile [Clean Development Mechanism or CDM](https://unfccc.int/process-and-meetings/the-kyoto-protocol/mechanisms-under-the-kyoto-protocol/the-clean-development-mechanism)). The issuance of offsets in domestic trading mechanisms increased by [25% in 2020 (compared to 2019),](https://openknowledge.worldbank.org/handle/10986/35620) led by the California Compliance Offset Program and the Australia Emissions Reduction Fund. While CDM is being phased out to give way for a new international mechanism.

CDM was a cap-and-trade scheme that was established under the Kyoto Protocol. It allowed governments or private entities in industrialized countries (Annex I) to implement emission saving projects in developing countries (Annex II). This helped the Annex I countries to meet their emission quota while the Annex II countries got the needed finance to kickstart climate friendly projects. At present the provision of a multilateral cap and trade scheme is encapsulated in the Article 6 of the [Paris Agreement](https://unfccc.int/process-and-meetings/the-paris-agreement/the-paris-agreement). The [COP 26](https://unfccc.int/conference/glasgow-climate-change-conference-october-november-2021) finally saw countries coming together to agree on its implementation.

**Voluntary Markets**

The share of voluntary carbon projects and offsets is increasing in the overall offset market. [**In 2015, voluntary crediting mechanisms contributed less than 20% to the annual issuances. This number increased to over 50% in 2019**](https://openknowledge.worldbank.org/bitstream/handle/10986/33809/9781464815867.pdf?sequence=4&isAllowed=y). In 2021, [the voluntary carbon markets have already recorded a growth of over 60% over the last year](https://www.ecosystemmarketplace.com/articles/press-release-voluntary-carbon-markets-rocket-in-2021-on-track-to-break-1b-for-first-time/#:~:text=In%20the%20first%20eight%20months,goals%2C%20a%20new%20report%20finds.). This indicates that many more organizations and individuals are resorting to voluntarily offsetting, by using independent crediting mechanisms. To keep up with the 1.5**°**C pathway the global demand for voluntary carbon offsets (resulting from a carbon asset) needs to increase by at least [15X by 2030 and 100X by 2050. Or from 100 million offsets in 2020 to at least 1.5–2 bn in 2030.](https://www.mckinsey.com/business-functions/sustainability/our-insights/a-blueprint-for-scaling-voluntary-carbon-markets-to-meet-the-climate-challenge)

Voluntary carbon credit demand scenarios (GtCO2e/year)

Within the voluntary carbon offset markets, the largest share of offsets is issued under the VCS framework of Verra, making these offset types the most liquid and widely traded.

PS: This is from the blog I wrote for my venture OffsetFam.

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*Originally published on [0xsaraf](https://paragraph.com/@0xsaraf/a-primer-on-carbon-markets)*