Are Carbon Credits Regulated by the Government?

Carbon credits are tradable certificates representing verified reductions of greenhouse gas emissions. They are often used as a way to compensate for companies, individuals, or nations that cannot easily reduce their own emissions. Purchasing carbon credits allows them to offset or cancel out their remaining emissions and continue operating, often at a lower financial cost. A credit is typically valued at one tonne of CO2e (carbon dioxide equivalent), the amount of carbon generated by driving a car or burning electricity for an hour.

There are two different markets for carbon.credit, both based on the same basic concept. The first, known as a compliance market, operates within regulatory cap-and-trade systems in which governments set emissions limits for industries and sectors, issue a corresponding number of carbon credits to those companies, then trade these credits on a public exchange to ensure compliance with the limit. The second market, known as a voluntary carbon market, is independent of regulation and includes companies that voluntarily purchase carbon credits to offset their emissions, often for environmental or corporate social responsibility reasons.

Many companies in the voluntary carbon market promote their offset projects through marketing and communication efforts, leveraging them as part of their branding and corporate social responsibility programs. These companies can be a great resource for helping to raise awareness and inspire others to take action against climate change, but they do not have the same level of accountability or transparency as their counterparts in a compliance market.

Several groups are responsible for setting standards and verifying carbon credit projects in both markets, including certification organizations like the Climate Action Reserve, Gold Standard, and American Carbon Registry, as well as accreditation bodies that establish a code of conduct and provide oversight. In addition, the International Civil Aviation Organization’s Greenhouse Gas Protocol provides an accounting framework and a methodology for establishing greenhouse gas accounting rules and procedures.

The biggest difference between a compliance and voluntary carbon credit market is that a compliance market involves emissions reductions that are mandated by law and count toward a country’s mandatory emissions targets, while a voluntary carbon credit market does not. Compliance credits are created in a variety of ways, such as reducing emissions at a power plant or factory by installing energy efficiency measures, preventing deforestation through reforestation projects, or capturing and storing CO2 from the air, through technologies like engineered forests and direct air capture.

While the Kyoto and Paris agreements established the first major carbon credit trading markets, today there are dozens of carbon markets worldwide. Some are operated by local, state, or federal governments, while others are open to all interested buyers and sellers.

While these markets have been successful at introducing a price signal into the global economy, they are not yet fully effective in reducing emissions. For example, the REDD+ program in Colombia, a forest protection scheme approved under the Kyoto Protocol, has resulted in unequal benefit sharing between communities and national companies, according to Mongabay.