Carbon credits are a popular mechanism to mitigate greenhouse gas (GHG) emissions and address climate change. There are two main types of carbon credits: voluntary and compliance. Voluntary carbon credits are purchased by individuals or companies voluntarily to offset their carbon footprint, while compliance carbon credits are traded under regulatory frameworks such as cap and trade systems. In this article, we will compare the two approaches with statistics to understand their respective markets and impacts.
The voluntary carbon credit market has seen significant growth over the past decade, driven by an increasing demand for environmental sustainability and corporate social responsibility. According to a report by Ecosystem Marketplace, the voluntary carbon market grew to 104 million metric tons of CO2e in 2020, with a total value of approximately $320 million USD. This represents an increase from the previous year, despite the impacts of the COVID-19 pandemic on the global economy.
The report found that the majority of voluntary carbon credits are sold to corporate buyers, who use them to offset their own emissions or meet sustainability goals. The top sectors for purchasing voluntary carbon credits are energy and utilities, followed by manufacturing, services, and finance. The report also found that the most popular types of voluntary carbon credits are those associated with renewable energy and energy efficiency projects.
Compliance carbon credits are traded under regulatory frameworks such as cap and trade systems. These systems typically set a limit or “cap” on the amount of GHG emissions that regulated entities can produce, and allow these entities to trade emissions allowances or credits to meet their compliance obligations. The value of the global carbon trading market under cap and trade schemes was estimated to be $194 billion USD in 2020, according to the World Bank.
The European Union Emissions Trading System (EU ETS) is one of the largest cap and trade systems in the world, covering more than 11,000 power and industrial plants across the EU. According to the European Commission, the EU ETS reduced emissions by 9% between 2005 and 2018, while the economy grew by 24%. This suggests that the system has been effective in reducing emissions while allowing for economic growth.
In addition to the EU ETS, several other cap and trade systems are in place around the world, including the Regional Greenhouse Gas Initiative (RGGI) in the United States and the Emission Trading Scheme (ETS) in China. According to the International Carbon Action Partnership, these systems collectively covered approximately 22% of global emissions in 2020.
While voluntary carbon credits and compliance carbon credits share a common goal of reducing GHG emissions, there are several key differences between the two approaches. One of the main differences is the regulatory framework. Compliance carbon credits are traded under mandatory regulatory frameworks, while voluntary carbon credits are not subject to any mandatory regulations.
Another difference is the price. Compliance carbon credits are traded on markets where the price is set by supply and demand. In contrast, the price of voluntary carbon credits is set by the seller, which can vary widely depending on the project and the seller’s reputation.
Despite these differences, both approaches have the potential to drive emissions reductions and promote sustainability. Voluntary carbon credits can be a valuable tool for companies that want to demonstrate their commitment to environmental responsibility, while compliance carbon credits can help regulated entities meet their obligations under regulatory frameworks.
Carbon credits are an important tool for mitigating GHG emissions and addressing climate change. Voluntary carbon credits are growing in popularity, driven by an increasing demand for environmental sustainability and corporate social responsibility. Compliance carbon credits are traded under mandatory regulatory frameworks and have been effective in reducing emissions in several countries. While both approaches have their respective strengths and weaknesses, they share a common goal of reducing GHG emissions and promoting sustainability