Operating Carbon Markets
TRADING SYSTEM & INDEPENDENT GOVERNANCE
- EUROPEAN UNION EMISSION TRADING SYSTEM
In 2005, the European Union Emissions Trading System (EU ETS) was launched, becoming the first and largest international carbon scheme in force.
The EU ETS covers approximately 40% of EU GHG emissions and includes more than 11,000 installations in the energy, domestic aviation and industrial sectors. It aims to reduce EU net GHG emissions by at least 55% by 2030 and reach climate neutrality by 2050.
The system works by setting a cap on emissions for each installation and allowing companies to trade allowances to emit a certain amount of GHGs. This has incentivized companies to reduce their emissions and invest in low-carbon technologies. Carbon credits from CDM and JI were allowed during several phases of the scheme.
- INTERNATIONAL CARBON REDUCTION AND OFFSET ALLIANCE (ICROA)
The development and growth of carbon markets have also led to the establishment of international independent standards to ensure that carbon offsets contribute to the reduction of GHG emissions, while bringing transparency and credibility to the process.
In 2008, the International Carbon Reduction and Offset Alliance (ICROA), was established to set a framework for carbon offset projects in the Voluntary Carbon Markets.
ICROA is a non-profit membership organization, that promotes high-quality carbon credits with its Code of Best Practice, which its members sign up and report against.
There are currently 4 endorsed United Nations and government standards, and 9 independent standards.
INDEPENDENT CREDITING MECHANISMS
As we will show later, the origins of the carbon markets owe much to independent initiatives. Yet, it was not until after the Kyoto Protocol (1997) formalized a “compliance market” that the independent initiatives became in themselves standards seeking to address the needs of corporate actors wishing to meet their carbon reduction commitments and corporate sustainability and responsibility.
The term ‘voluntary carbon market’ (‘VCM’) historically referred to carbon markets operating outside the scope of a regulatory framework. They function by pricing carbon emission reductions or removals that resulted from projects and/or programs and issuing “carbon credits”. That is the reason why the VCM standards are also referred to as independent crediting mechanisms. Nowadays, the standards are playing a role in the compliance markets, and the difference between both markets is not so relevant.
The VCM consists of several standards. They act as market regulators, providing the certification and issuance of the carbon credits, but also safeguarding the quality and credibility of the credits. To accomplish this role, these standards include a complete set of rules, requirements, and methodologies, and they lead regulatory procedures and a validation and verification system which is usually outsourced by third parties.
Some of these standards are:
- American Carbon Registry (ACR) was founded in 1996 and was the first private voluntary GHG registry in the World.
- Climate Action Reserve (CAR) began as the California Climate Action Registry in 2001.
- Gold Standard was established in 2003 by the WWF and other international NGOs.
- Verra and the Verified Carbon Standard program was founded in 2005 by environmental and business leaders.
Total retired credits (tCO2) per standard 2018-2022 (including REDD+ projects).
Data extracted from SustainCERT Market Share Yearly Analysis 2022
In Lesson 2, we will go deeper into independent crediting mechanisms and other types of carbon pricing instruments.
*Carbon markets are better defined by the nature of supply (independent standards such as Verra or GSG vs government-led standards) and the nature of demand (voluntary demand vs compliance demand) that characterize them.