The Voluntary Carbon Market vs the Regulatory (Compliance) Carbon Market

This blog is going to run you through two carbon markets

The Voluntary Carbon Market vs the Regulatory (Compliance) Carbon Market
Francesca Johnson
Feb 28, 2023

The carbon market is very confusing. 

Trust us, at Treepoints it took us a while to get our heads around all of the terminology and regulation surrounding it. 

We wanted to know, what do our clients have to do, if anything? And if they don’t have to do anything, what are the most effective, and robust projects that they can support to have a positive impact.

At Treepoints we primarily work with SMEs but it is important to understand the whole of the carbon market, especially as it is ever changing. Also, who doesn’t love policy?!

This blog is going to run you through the two different markets that enable (force) companies to assess their carbon footprint and reduce it. 

They are the regulatory carbon market and the voluntary carbon market. 

The Regulatory Carbon Market

A regulatory carbon market, or compliance market, is created by government regulation. A cap is placed on the total amount of GHG emissions that can be emitted by regulated entities such as power plants, factories, and other industrial facilities. 

These entities are required to hold permits, called emissions allowances or carbon credits, equal to their total emissions. If an entity emits less than their allocated number of allowances, they can sell the unused allowances to other entities who exceed their allowance. This creates an economic incentive to reduce emissions.

Regulatory carbon markets are typically operated by a government agency, which sets the emissions cap and enforces compliance with the regulations. These markets are legally binding, and entities that fail to comply with the regulations can face fines and other penalties. The most prominent example of a regulatory carbon market is the European Union Emissions Trading System (EU ETS), which is the largest carbon market in the world.

The Voluntary Carbon Market

A voluntary carbon market operates on a voluntary basis. Individuals or organizations can choose to purchase carbon credits to offset their own GHG emissions. These voluntary offset credits represent a reduction in GHG emissions from a project or activity, such as planting trees or installing renewable energy systems. 

The credits are typically verified by third-party organizations, such as Verra and the Gold Standard, which certify that the project has indeed reduced GHG emissions.

Differences between the two markets:

Factor Regulatory Voluntary
Legally binding Yes No
Goal Achieve emission reductions from the largest emitters Encourage broader participation in reducing emissions
Emissions Reductions Specific emission reduction targets set by governments Achieving emission reductions beyond what is required by regulation
Scale Significant reductions at scale Complement to regulation, encouraging action beyond what is legally required
Crediting Carbon allowances Project carriers which develop projects that avoid or capture CO2 emissions

Regardless of their differences, both markets are playing an important role in mitigating climate change and achieving a more sustainable future.

At Treepoints we help companies and individuals contribute to the voluntary carbon market. We are committed to constantly developing our risk matrix for how we choose our projects and publicly record all of our purchases for our portfolio here. 


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