Carbon Markets: A Guide to Understanding this Global Tool

Carbon markets enable companies and individuals to help control greenhouse gas emissions through financial incentives.

What you will learn

  • Carbon markets allow entities to buy and sell credits representing emission reductions.Compliance carbon market

  • The compliance carbon market stems from governments capping emissions that specific industries may create.

  • The voluntary carbon market includes businesses and individuals creating carbon-reducing projects and the purchase of carbon offsets.

What you will learn

  • Carbon markets allow entities to buy and sell credits representing emission reductions.Compliance carbon market

  • The compliance carbon market stems from governments capping emissions that specific industries may create.

  • The voluntary carbon market includes businesses and individuals creating carbon-reducing projects and the purchase of carbon offsets.

A carbon market is a system that enables businesses and governments to trade credits for carbon emissions. The market sets a price for carbon and creates an incentive for businesses to reduce greenhouse gas emissions. The global carbon market is one way to cut GHG emissions and help prevent climate change.

As global warming continues, many businesses must face the fact that they play a role in the planet's changing climate. Businesses in the cryptocurrency and blockchain world are no exception. In fact, cryptocurrency miners have come under fire for using large amounts of electricity. Some companies have taken steps to mitigate their impact, and others have been forced to make changes. In this paper, the UCL Centre for Blockchain Technologies team reviews expected energy consumption per transaction, as a function of network load.

Carbon markets offer interesting ways that businesses and governments can work together to combat climate change. Learning about carbon offsetting is a good way to understand the methods companies like Hedera use to protect our planet.

What is a carbon offset?

Carbon offsetting is an effort to reduce global greenhouse gas emissions or increase carbon storage to compensate for emissions elsewhere. Planting trees, restoring land, and converting landfill emissions into energy are examples of project types used for carbon offsets. Many companies seek to offset their carbon dioxide production by funding carbon offsetting projects.

What is a carbon market?

Carbon markets allow entities to buy and sell credits representing emission reductions.

The carbon credit system was first conceptualized in an international treaty adopted in 1997, known as the Kyoto Protocol. The treaty suggested that developed countries buy carbon credits to offset production of carbon dioxide and other greenhouse gasses. Around 170 countries signed the treaty and committed to emission reduction targets. Many countries later withdrew from the treaty since it didn't require developing countries to participate.

Many countries that withdrew from the Kyoto Protocol later signed on to the Paris Agreement of 2015. The Paris Agreement calls on countries to set emission reduction targets. It also established a global carbon market that uses carbon credits to mitigate the climate crisis.

A closer look at carbon markets


Compliance carbon market

For compliance purposes, governments cap the emissions that specific industries are permitted to create. The compliance market uses credits given to businesses to represent the emissions they're allowed to produce in a given year. If a company exceeds its emissions cap, it must buy more credits. However, market participants can sell credits if their own emissions are below the cap. This system is known as cap and trade.

Voluntary carbon market

Voluntary carbon markets use credits made by projects aimed at reducing emissions. Businesses reliant on fossil fuels can use these voluntary carbon credits to offset their emissions. Voluntary markets lack the government oversight associated with compliance markets, relying instead on third-party intermediaries to verify the greenhouse gas emissions reductions associated with the credits. Individuals and businesses can buy credits, paying for renewable energy efforts and other projects to help meet emissions reduction targets.

How do carbon markets work?

The compliance carbon market involves businesses in the private sector, such as oil companies, cement manufacturers and agricultural industries. Cryptocurrency businesses are not yet required to participate, although that may change in the near future. If a company is capped at 80 units of greenhouse gas emissions but typically produces 120 units in a given year, it will have to buy carbon credits to meet its required climate goals.

Entities that reduce their carbon footprint can work with third-party auditing firms to verify that they've generated carbon credits. Then a regulatory agency reviews the project and issues carbon credits, which can be sold to other businesses.

Entities participating in voluntary carbon markets aren't doing so to maintain regulatory compliance. These markets don't require regulatory agencies to produce credits. In most cases, the credits can't be used to meet mandated greenhouse gas caps.

Still, the voluntary market plays a vital role in climate action. Many businesses that aren't required to limit their emissions still participate in the voluntary market. For example, Hedera buys carbon offsets generated by the Greater Lebanon Refuse Authority every quarter. Through the voluntary market, Hedera bought over 70 metric tons of carbon offsets from October 2021 to September 2022.

Hedera isn't the only cryptocurrency-related business using carbon offsets and emissions trading systems to help the environment. There are numerous blockchain project developers committed to carbon-negative operations. These projects often use or produce carbon market instruments stored on distributed ledgers to shrink their carbon footprint. For instance, Hedera and ServiceNow work together to manage carbon credit data and increase trust in the carbon credit system.

What is the purpose of a carbon market?

Companies and individuals participating in the carbon market are primarily doing so to improve the environmental integrity of our planet. They might believe it is necessary to stabilize global temperatures because a healthy planet is required for a healthy economy. They also might be influenced by public opinion and government regulations designed to meet climate change goals.

Ideally, creating better incentives for businesses to reduce their carbon footprint will lead to more companies working to reduce emissions. The current carbon credits market has a serious problem caused by organizations using the same carbon credit multiple times. This, of course, defeats the purpose of carbon offsetting. Luckily, the immutable, publicly-viewable nature of DLTs offers an easy way to solve this problem. Distributed ledger technology may play an essential role in future carbon markets, as it can better track the creation and trading of carbon credits.

Committed to change

The carbon credits system relies on market mechanisms to further climate mitigation. The fluctuating carbon prices in the emissions trading system incentivizes businesses to generate, save, and sell new credits since there can be financial penalties if they don't. Additionally, the voluntary carbon market offers an exciting way for DLT-centric companies to offset their greenhouse gas emissions.

Many DLTs use the carbon credits system, and Hedera is committed to leading in this effort and going carbon negative. Hedera buys carbon offsets on a quarterly basis and ensures the proof certificates are viewable on its website. Hedera's carbon footprint is already significantly smaller than many cryptocurrencies, thanks to its DAG-based DLT technology that doesn't need miners. By using less energy and supporting carbon offset projects, Hedera can continue its carbon-negative operations.

Related reading

What are Carbon Credits

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