Brief Introduction to Carbon Markets

As a brief overview, carbon markets first emerged from the Kyoto Protocol era, most notably the Clean Development Mechanism. The Clean Development Mechanism was widely regarded as a failure, but from its ashes emerged the Voluntary Carbon Market, which coordinates the generation, sale, and purchase of carbon offsets to companies that voluntarily purchase them as part of ESG strategies, climate commitments, and marketing programs. This is a large part of where familiar “net zero” claims come from.

Carbon offsets are commonly defined as the reduction, avoidance, or removal of a unit of greenhouse gas emissions by one entity that is purchased by another entity to counterbalance a unit of greenhouse gas emissions by that other entity. Offset projects can include forest conservation, tree planting, clean cooking interventions, or renewable energy projects intended to replace fossil fuel use. These projects generate credits, each typically equivalent to one metric tonne of carbon dioxide equivalent.

Projects that generate credits on the basis of reforestation or preserving carbon in vegetation or soil are often referred to as nature-based offsets. Project developers design and implement projects. Certification bodies, also known as standards bodies, approve projects after validation bodies examine the underlying process and science against established rules. Carbon registries issue the credits and track their use or retirement, while carbon ratings agencies increasingly evaluate the quality of credits and rate them for clients and buyers.

Individuals, companies, or countries, typically large multinational firms or wealthy states, that emit greenhouse gases can purchase credits to reduce their “net” carbon footprint, at least on paper. Many of these credits are traded on the international Voluntary Carbon Market, while others are bought and sold on legally binding compliance markets such as the European Union or China emissions trading systems. As Article 6 of the Paris Agreement continues to be developed, carbon credits are also moving more directly into formal international climate governance.

While carbon markets have historically been controversial as mechanisms for supposedly cost-effective emissions reduction, they increasingly resemble financial markets. This has created a widening split between debates that focus on whether carbon markets actually reduce emissions or support sustainable development, and debates that focus on how to regulate, standardize, support, and grow the market despite its failures.

Additionality

One of the foundational concepts behind carbon markets, additionality means that the project is not legally required, not already common practice, and not financially viable without carbon credit revenue. In simple terms, additionality asks whether the intervention would have happened anyway irrespective of the revenue from selling carbon credits.

In the case of many renewable energy projects that use carbon credits, the case for additionality has often been weak, especially as renewable energy has become more cost effective and governments have implemented other forms of policy support and financial incentive.

In recent years, it has become increasingly clear that testing for additionality is not simply a binary matter of “additional” or “not additional.” In practice, it often operates more as a spectrum, and carbon markets have developed a growing number of additionality tests in response. Accreditation of carbon offsets still generally results in a binary certification outcome, but ratings agencies have stepped in to capture more of this spectrum of quality and risk.

African Carbon Markets Initiative

ACMI was launched by the Global Energy Alliance for People and Planet, Sustainable Energy for All, and UNECA at COP27 in Sharm el-Sheikh, Egypt. Its launch involved the Kenyan government along with a number of other African political figures and included support from McKinsey. While civil society representation has been limited, one does find representatives from ICVCM and former leadership connected to Verra within the initiative’s broader governance environment.

ACMI’s main objectives include:

• Growing African carbon credit retirements from roughly 16 MtCO2e retired in 2020 to around 300 MtCO2e per year by 2030, and far higher by 2050.
• Creating or supporting millions of jobs through carbon project development, execution, certification, and monitoring.
• Raising the quality and integrity of African credits in order to mobilize billions of dollars in climate finance.
• Ensuring more equitable and transparent distribution of carbon credit revenue, with a significant share flowing to local communities.

Carbon Credits / Carbon Offsets

On its most basic level, a carbon offset is the reduction, avoidance, or removal of a unit of greenhouse gas emissions by one entity that is purchased by another entity to counterbalance a unit of greenhouse gas emissions by that other entity. On a more technical level, offsets are often associated with the Voluntary Carbon Market, whereas carbon credits may also refer to units representing greenhouse gas emissions that are traded within an emissions trading system or another compliance market. For the purposes of this knowledge hub, these terms are used interchangeably unless a more precise distinction is needed.

Carbon credits can be generated from a wide range of activities, from nature-based offsets to renewable energy, to carbon capture and sequestration technologies. Their tradability, or fungibility, depends on the premise that each represents the same thing: one metric tonne of carbon dioxide or its equivalent in another greenhouse gas.

The fact that these units are produced from a wide variety of project types means that the purchase of different credits can carry very different risks, and where the financing ultimately goes can be vastly different across projects that are treated as formally comparable. This can be true even for projects that are considered the same from the standpoint of standards bodies and methodologies.

With all this in mind, exactly what a carbon credit is remains an active subject of debate. Questions continue around whether carbon credits should be treated as commodities, securities, or some other kind of legal asset. Governments have had to take positions on these issues as they develop legislation, and the answers may have major implications for carbon rights, ownership structures, and national regulatory frameworks. These questions are becoming even more important as Article 6 becomes more operationalized.

Compliance Markets

Compliance carbon markets are established and run by governments, usually as systems for trading emissions allowances or carbon-related units within a national or regional jurisdiction.

The most common form of compliance system is an Emissions Trading System, or ETS, which bakes the cost of greenhouse gas emissions into business decision-making by controlling the quantity of emissions businesses under the system can produce, while the price of those emissions fluctuates with the supply and demand of allowances. This makes ETS systems different from carbon taxes, which control the price directly rather than the quantity. Although carbon taxes differ from compliance carbon markets, they are sometimes discussed as part of broader compliance policy systems.

There are two major ways of governing an ETS: cap-and-trade systems and baseline systems. Cap-and-trade systems are the most common. In these systems, companies must purchase or hold allowances for their emissions, and the number of allowances issued by the government acts as a cap on total emissions. The cap is generally supposed to decline over time.

The baseline model, by contrast, requires companies to meet a given emissions target. If a company performs better than the target, it may generate a tradable credit. China has the largest ETS in the world in terms of emissions coverage, while the European Union ETS remains the largest by market value. Other major systems include South Korea, California, and the United Kingdom.

These systems are generally not linked to one another, meaning units in one jurisdiction typically cannot be applied in another. Compared with voluntary markets, there is stronger reason to believe that carbon pricing under ETS systems can support emissions reductions, though outcomes depend heavily on system design and political implementation.

Integrity Council for the Voluntary Carbon Market

ICVCM is an integrity-focused certification body that developed the Core Carbon Principles, which function as an additional quality layer for projects and credits that meet higher standards. The broader idea is that credits carrying a CCP label will command a premium price and serve growing demand for credits considered higher quality.

Integrity initiatives such as ICVCM and the Voluntary Carbon Market Integrity Initiative emerged in response to media backlash and growing scrutiny of projects that, when investigated, appeared to deliver little environmental impact and were often associated with abuse or exclusion of local landholders and communities. These initiatives aim to address concerns from buyers about whether credits genuinely represent one metric tonne of carbon dioxide equivalent, and whether projects have adequate safeguards for community rights, environmental integrity, and market accountability.

They also respond to host-country concerns, including weak benefit-sharing, harms to communities or biodiversity, lack of alignment with national policy, and the export of mitigation outcomes that may interfere with a country’s own NDC goals.

The ten Core Carbon Principles include:

• Effective governance
• Tracking
• Transparency
• Robust, independent third-party validation and verification
• Additionality
• Permanence
• Robust quantification of emissions reductions and removals
• No double-counting
• Sustainable development benefits and safeguards
• Contribution to net-zero transition

ICVCM has also made important attempts to engage with benefit-sharing arrangements in the voluntary carbon market. While current CCP requirements are still limited on this front, ICVCM has indicated that future iterations may include stronger guidance around transparency in the use and management of revenue for benefit-sharing. Some stronger proposals, including mandatory benefit-sharing arrangements, have faced resistance from major standards bodies.

Nationally Determined Contributions (NDCs)

NDCs outline countries’ strategies to reduce emissions and adapt to climate-related effects under the Paris Agreement. Countries are expected to update their NDCs every five years, with each update intended to increase ambition over time.

Each party to the Paris Agreement is expected to set out its NDC as an actionable plan and to implement monitoring procedures that allow progress to be tracked. When certain NDC targets depend on external financing, these are often referred to as conditional targets. When goals can be attained without external financial support, they are considered unconditional targets.

As countries develop programs for authorizing Article 6 transfers, many are prioritizing harder-to-abate sectors within conditional targets while reserving easier or cheaper mitigation opportunities for unconditional programs. In this way, countries seek to participate in Article 6 without undermining their own NDCs, especially where Article 6 transfers require corresponding adjustments.

Nature-Based Offsets

Nature-based offsets, often framed in carbon market language as nature-based solutions, typically involve land-sector activities such as avoided deforestation, afforestation, reforestation, restoration, improved forest management, or soil carbon sequestration that claim emissions reductions or removals.

Nature-based offsets are often promoted as providing climate mitigation alongside ecological and social co-benefits. At the same time, they face recurring constraints around governance, additionality uncertainty, and permanence risk. Permanence risk is especially serious because land-based carbon sequestration generally does not lock away carbon on the kinds of time scales associated with fossil fuel emissions, and therefore cannot straightforwardly “offset” fossil fuel combustion.

In addition, nature-based projects often run into land tenure issues involving communities living in or around project areas. These tensions can compound technical questions about whether a project represents real emissions reductions by introducing further legal, ethical, and reputational risks where community rights are weakly protected or violated.

Proponents argue that nature-based projects can channel climate finance toward rural communities in the Global South and incentivize more sustainable land-use practices. Critics counter that these goals would often be better pursued through non-market approaches or, at minimum, through much stronger safeguards and benefit-sharing mechanisms than are currently common.

Permanence

Permanence concerns the risk that carbon counted as stored or sequestered is later released through natural or human-caused disturbances, undermining the equivalence between fossil emissions and land-based storage.

Scientific and policy debates emphasize that permanence is a persistent limitation for land-based mitigation and must be addressed through institutional design, including monitoring, liability rules, and buffer pools. Even so, these systems often function more like insurance than a guarantee. Their effectiveness depends on how accurately risks such as fire, disease, drought, or future land-use change are modeled and governed.

In the context of Article 6 and international carbon markets, permanence becomes a cross-border credibility issue. If credits are to support claims of real, verified, and additional mitigation outcomes, permanence has to be monitored, tracked, and made auditable over time.

REDD+

REDD+ is the UNFCCC framework for reducing emissions from deforestation and forest degradation, while also addressing conservation, sustainable management of forests, and enhancement of forest carbon stocks. It was developed through UN climate negotiations and tied to safeguards and implementation guidance meant to shape how forest-based mitigation is pursued.

REDD+ safeguards include expectations around transparent and effective governance, respect for Indigenous peoples and local communities, full and effective participation, and consistency with conservation of natural forests and biodiversity. Subsequent UNFCCC decisions also elaborated the need for safeguard information systems and reporting on how safeguards are addressed and respected.

Critiques and Implications

A major issue lies in the mismatch between REDD+ as a broad policy framework and the way REDD+ projects have been used to generate credits in voluntary markets. Many such projects rely on baseline scenarios about what would have happened in the absence of the project, and these baselines are notoriously difficult to verify in advance.

Another major problem is that these baseline scenarios can become unrealistic over time as conditions change, increasing the risk of over-crediting. In this sense, the presence of safeguards at the policy level does not guarantee that individual projects are accurately measuring carbon outcomes.

When REDD+ credits are used in international transfers or national-level claims, stricter standards become even more important. Questions of verification, additionality, tracking, and host-country alignment become central to whether such credits can be treated as credible mitigation outcomes.

Standards Bodies

Standards bodies, also called certification bodies, establish the methodologies and rules through which projects are evaluated and credits are issued. Their role is to ensure that projects satisfy core market requirements such as additionality, avoidance of overestimation, treatment of permanence, exclusive claim to reductions, legal compliance, and in some cases demonstration of social or environmental co-benefits.

The major standards bodies emerged in the wake of the failures associated with earlier Kyoto-era mechanisms. Important names in this space include Verra, Gold Standard, American Carbon Registry, and Climate Action Reserve.

Validation & Verification Bodies

Validation and verification bodies assess whether project designs, monitoring approaches, and reported emissions outcomes meet the requirements of the relevant standards and methodologies. Their work is central to the legitimacy of carbon market claims, but it also remains part of broader debates over auditor independence, consistency, and institutional accountability.

Verra

Verra manages the Verified Carbon Standard, or VCS, one of the most influential global crediting programs. Through its program rules, standards, and methodology requirements, Verra governs project development, credit issuance, methodological design, and accreditation expectations for auditors.

Verra’s framework includes detailed rules for project crediting periods, monitoring expectations, and approaches to uncertainty and conservativeness. These requirements are especially important in sectors such as forestry and other AFOLU project types, where questions of permanence, monitoring, and overestimation are especially difficult.

Voluntary Carbon Market

The voluntary carbon market refers to the set of arrangements through which private actors buy, sell, and retire carbon credits outside legally binding public compliance systems. It is one of the most visible and contested spaces in contemporary climate governance because it sits at the intersection of private climate claims, international finance, project development, and ongoing policy experimentation.

The voluntary market is where many corporate net-zero claims, ESG strategies, and offset-based climate narratives are made operational. It is also the part of the broader carbon market landscape that has faced some of the most intense criticism around additionality, over-crediting, permanence, baseline inflation, and harms to communities living in or around project lands.

Although this section is not yet as fully developed as some of the others, the voluntary carbon market remains central to understanding why carbon markets matter politically, economically, and socially. A fuller section here will further explain market structure, major actors, credit issuance and retirement, and the main debates over legitimacy and reform.

Voluntary Carbon Market Integrity Initiative

The Voluntary Carbon Market Integrity Initiative, or VCMI, focuses on demand-side integrity. More specifically, it addresses how companies should use carbon credits and what they can credibly claim while pursuing science-aligned decarbonization. VCMI frameworks emphasize that companies should prioritize emissions reductions within their own value chains before turning to credits.

Over time, VCMI’s governance has expanded through claims guidance and monitoring, reporting, and assurance frameworks. These frameworks increasingly connect corporate climate claims to questions of third-party assurance, transparency, disclosure, and policy alignment.

VCMI also increasingly positions itself as a bridge to host-country policy implementation, treating Article 6 mechanisms as part of the broader carbon market landscape that governments must navigate. In this sense, its relevance extends beyond private claims-making into questions of public policy readiness, authorization, and accountability.

Shortcomings

A major controversy is whether stronger discipline on the demand side can really solve structural problems on the supply side. Even where companies are pushed toward more careful claims, deeper problems such as inflated baselines, leakage, and reversals remain unresolved if the underlying credits are weak.

A second issue is that VCMI remains a voluntary and largely soft-law initiative. Its effectiveness depends on reputational pressure and assurance systems that may vary significantly across jurisdictions and providers. A third issue is that important metrics can still be defined with substantial flexibility, creating room for selective interpretation and reducing comparability across firms.

There is still limited evidence on whether these emerging claims frameworks actually lead companies to invest more in real emissions reductions rather than simply changing the optics of climate action. Questions also remain about how tiered claims interact with the quality, supply, and price of credits in practice.