regulatory compliance markets & voluntary markets
Two types of carbon markets exist; the regulatory compliance and the voluntary markets. The compliance market is used by companies and governments that by law have to account for their GHG emissions. It is regulated by mandatory national, regional or international carbon reduction regimes.
Compliance markets are created and regulated by mandatory national, regional, or international carbon reduction regimes. Compliance offset market credits may in some instances be purchased by voluntary, non-regulated entities, but voluntary offset market credits, unless explicitly accepted into the compliance regime, are not allowed to fulfill compliance market demand.
Voluntary carbon markets enable businesses, governments, nonprofit organizations, universities, municipalities, and individuals to offset their emissions outside a regulatory regime. These entities can purchase offsets that were created either through the voluntary or compliance markets.
The concept of carbon offsetting arose in the late 1980s, as policymakers first began to seriously grapple with how to mitigate climate change. Although the first demonstrations of carbon offset projects involved voluntary arrangements, the idea evolved into a tool for controlling costs within broader “market mechanisms” for addressing GHG emissions, including emissions trading systems. The first and largest carbon offset program was the CDM, established under the Kyoto Protocol as a mechanism to allow developed countries to cost-effectively meet emission reduction obligations by investing in mitigation in developing countries. As the comparison of offset programs suggests, a number of other regulatory emissions trading systems have also incorporated carbon offset credits as a compliance tool. Because demand for compliance offset credits is driven by regulatory obligations, their prices tend to be higher than offset credits issued solely for the voluntary market.