The carbon credit market measures emissions reductions by issuing certificates – each one reflecting a metric ton of CO2 or other greenhouse gas. Companies can then buy or sell these credits to meet more ambitious climate targets than they are capable of delivering through internal reductions alone. The carbon market has two distinct parts: a regulatory market set up by “cap-and-trade” regulations at the local, state and national levels; and a voluntary market where businesses and individuals purchase credits to offset their own emissions.

In the regulated market, each company operating under a cap-and-trade scheme is issued with a fixed number of credits that they can emit that year (or, in some cases, can bank or sell their extra allowances). When a company reduces its emissions, they generate a carbon credit that they can then trade on the open market to offset their remaining emissions.

For example, Company 1 is on track to emit 300 tons of carbon this year but has 100 carbon credits left over from last year, which they can trade for emissions reductions in another part of the world. In this way, the company can stay below its cap and avoid a penalty that would be comprised of fines and additional taxes.

However, many large companies are still years away from being able to significantly cut their emissions on their own. They may still need to look to the broader carbon market for help. This is why companies like Xpansiv CBL and ACX operate in the voluntary market. These exchanges are able to provide carbon credit buyers with access to projects that can deliver the type and size of emission reduction they are seeking.

There is a wide range of carbon credit market projects in the market, and it is the nature of each project that determines its price. For this reason, Platts publishes pricing indications for different categories of carbon projects as they trade in the broader voluntary market and not just as they participate in the CORSIA scheme.

In addition, there are other mechanisms in place to support low carbon transformation. For example, under the Clean Development Mechanism, developing countries can receive certified emission reductions in exchange for supporting sustainable development initiatives. This can include activities such as reducing deforestation, increasing energy efficiency and investing in renewables.

The carbon credit market is an important part of the global effort to tackle climate change. It has the potential to encourage new investment and innovation, create markets for a range of technologies that could mitigate climate change, and provide a vital source of income to those who are reducing their own carbon footprint. However, the system needs to be improved and refined in order to succeed. In recent years, the CCX experienced problems including unbalanced supply and demand and volatility in prices. This has been partly blamed on weak and nebulous market design, but also by flooding the market with offsets that failed to meet basic specifications.