Due to climate change, mainly caused by the presence of greenhouse gases (GHG) in the atmosphere, more and more actions are being carried out in order to counteract and stop its effects. One of these measures is carbon markets, which allow limiting and controlling the amount of CO2 and other GHGs that are emitted annually into the atmosphere. This system has its advantages and disadvantages. However, it is one more measure aimed at reducing the impact that climate change has on our planet, so it is worth taking it into account and knowing it.
What are carbon markets
Carbon markets are based on the sale or acquisition of so-called carbon credits or GHG emission reduction certificates . These bonds are documents that enable their owner to emit a certain amount of CO2 and GHG. In other words, if you have a certain number of bonds, you have the right to emit a certain amount of GHG in a year. In general, each of these bonds is equivalent to one ton of CO2, although, depending on the type of GHG in question, it can be stipulated in one quantity or another.
These bonds are distributed among the main GHG emitting companies and, by law, they are obliged to issue an amount that is equal to or less than the amount of bonds they own. However, these bonds can be sold and bought, and this is where we would talk about the carbon market. In this way, if a company is not going to consume its carbon credits, it can sell them to another company that does and, in this way, the second company can exceed the amount of GHG emissions or greenhouse gases that had been attributed to it. initially.
In short, carbon markets are the space where companies that work with carbon credits can trade with them to transfer GHG emission rights. These markets can be regional, national or international, so it is a sector with a fairly broad projection.
Although there are different types of carbon markets , for example if we are talking about a geographical scope (regional, national or international), the most common distinction that is usually made when talking about types of carbon markets is the one that exists between carbon markets regulated and voluntary .
Regulated carbon markets
It is the main representative of the carbon markets since, being regulated, they are mandatory . In this regard, we are talking about companies that must demonstrate that their GHG emissions correspond to the quotas that their bonds allow. It is, to put it simply, the official carbon market, which is controlled by governments and other supranational institutions.
Voluntary carbon markets
On the contrary, the voluntary carbon market is the one that refers to the market that trades with this type of bonds but that is outside the official and mandatory requirements. In other words, it is a market of companies that voluntarily demand that they comply with a series of minimums regarding GHG emissions. However, in the event that these companies, for whatever reasons, fail to meet the self-imposed minimums, there would be no penalty (mainly in the form of economic sanctions) as is the case in the cases of regulated carbon markets.
Carbon markets work in a simple way, and directly affect all GHG-emitting companies that operate in countries that are signatories of this system. Broadly speaking, these countries would be the signatories of the famous Kyoto Protocol , as well as all the countries of the European Union.
Its operation is based on the initial distribution of a series of bonuses according to the “needs” and expectations of each company. From there, the trading of these bonds is carried out voluntarily and practically freely. In this way, a company that invests in clean technologies will have a surplus of carbon credits, so it will be able to sell them and amortize the implementation of this clean technology. On the contrary, a company that is very polluting and does not invest in the renovation of its equipment, will need to buy bonds to be able to pollute according to its needs, so it will be much more expensive than the less polluting company. On the other hand, a company can also keep its own carbon credits and, if needed, use them in the future or sell them later.
Likewise, the emissions carried out must be monitored , as well as that these are in accordance with the bonds available in each case. When this does not happen, the official bodies are in charge of carrying out the corresponding and proportional economic or administrative sanctions for each company that exceeds the GHG emission.