There are two types of carbon markets based on their governance structure. These are:
Compliance Carbon Market
The Compliance Carbon Market (CCM), also known as ‘mandatory carbon markets’ are regulatory trading mechanisms ruled by governments at international, national or regional levels. They are driven by regulatory requirements or policies to limit GHG emissions from specific sectors.
The implementation of these schemes is mandatory for the entities or businesses that emit GHG emissions which must adhere to specific regulations.
The CCM is crucial for governments to meet their carbon reduction targets. The current initiatives are designed to target the most energy-intensive industries, such as power generators and oil refineries, as well as the metallurgical, cement, and paper industries, among others.
Voluntary Carbon Market
The Voluntary Carbon Market (VCM) is based on voluntary and private initiatives therefore its participation is not mandated by government regulations. As a proactive initiative to meet the sustainability goals, take responsibility for their carbon footprint and offset their emissions, several types of entities engage with the VCM, such as businesses, government departments, NGOs, and single individuals.
Besides providing a source for funding sustainable development projects, the VCM contributes too to generate price signals for carbon credits which stimulate innovation and investment in low-carbon technologies.
Additionally, these schemes offer organizations the opportunity to take voluntarily action against climate change and demonstrate their commitment to protecting the environment.
Markets and Mechanism’ Components