The Current State of Carbon Credit Markets

Here's a brief overview of the market dynamics:

• Voluntary Market: Although smaller in scale, the voluntary market is rapidly growing and evolving, driven by increasing interest from companies seeking to enhance their sustainability profiles.

• Compliance Market: Dominated by large-scale industrial players, the compliance market is heavily regulated and is critical for nations to meet their international climate commitments.

Within the compliance market, particularly in systems like the EU ETS, 'allowances' are a specific type of carbon credit.

Instead of a ton of CO2 removed by a green project, an allowance is issued by governments and gives the holder the right to emit one tonne of CO2 or an equivalent amount of other greenhouse gases. These allowances can be traded, creating a market that sets a price on carbon emissions and incentivizes emission reductions.

Carbon pricing has become a key policy tool for decarbonization, now covering almost a quarter of global greenhouse gas emissions. The World Bank's 2023 report highlights that despite the challenging economic climate, revenues from carbon taxes and Emissions Trading Systems (ETS) have reached a record high of about $95 billion. The uptake of these pricing instruments is increasingly visible in emerging economies, though high-income countries still dominate the landscape. New carbon pricing instruments have been implemented across various countries and subnational jurisdictions, signaling a broadening commitment to carbon market mechanisms. However, the carbon credit market has seen a slight decline in issuances and retirements compared to the previous year, attributed to macroeconomic conditions, criticism, and issuance bottlenecks[1].