What are carbon markets?
A community-maintained introduction. Last updated July 2026.
Carbon markets are trading systems where carbon credits and allowances are bought and sold. They turn carbon emissions into a priced commodity, creating a financial incentive to reduce pollution. One credit or allowance equals one metric ton of CO₂e.
Two types of carbon markets
| Compliance (mandatory) | Voluntary (VCM) |
|---|---|
| Government-regulated cap-and-trade systems | Companies and individuals buy credits voluntarily |
| Companies must hold allowances equal to their emissions | Used to meet net-zero pledges and ESG goals |
| Examples: EU ETS, California Cap-and-Trade, China ETS | Standards: Verra (VCS), Gold Standard, CAR, ACR |
| Prices set by regulation and auction | Prices vary by project type, location, and co-benefits |
How compliance markets work: cap-and-trade
- A government sets a cap, a limit on total emissions for covered sectors (power, industry, aviation).
- Allowances are distributed, either freely allocated to emitters or sold at auction.
- Companies trade, those that reduce emissions below their cap can sell surplus allowances. Those that exceed must buy.
- The cap tightens over time, reducing the total supply of allowances and driving up the carbon price.
Major carbon markets in 2026
- EU Emissions Trading System (EU ETS). The world's largest carbon market. Covers ~40% of EU emissions. Prices reached €100/ton in 2023.
- California Cap-and-Trade. Linked with Québec. Covers power, industry, and transport fuels.
- China National ETS. Largest by covered emissions (power sector only, expanding to industry).
- UK ETS. Replaced the EU ETS post-Brexit with its own system.
- CORSIA. UN aviation offsetting scheme. Airlines must offset emissions above 2019 levels.
The voluntary carbon market (VCM)
Companies outside regulated sectors buy carbon credits from projects that reduce or remove emissions. The VCM was worth ~$2 billion in 2023.
A carbon credit only counts if the emission reduction would not have happened without the project. This test, additionality, is the central challenge of the VCM, and its central controversy.
- Nature-based credits. Reforestation, avoided deforestation (REDD+), soil carbon. Largest volume, lower prices.
- Tech-based removals. Direct air capture (DAC), biochar, enhanced weathering, mineralization. Higher prices, smaller scale.
- Renewable energy credits. Wind, solar, hydro projects that displace fossil fuel generation.
Key challenges & trends
- Quality and integrity. Investigations have revealed projects that overstated their impact. ICVCM's Core Carbon Principles aim to establish a quality benchmark.
- Article 6 of the Paris Agreement. Rules for international carbon trading between countries are still being finalized, with major implications for market structure.
- Price divergence. Compliance allowances trade at much higher prices than voluntary credits, reflecting different levels of regulatory certainty.
- Border carbon adjustments. The EU's CBAM imposes a carbon price on imports, pushing carbon pricing global.
Further reading
This is a community wiki. Have something to add? Submit a post or join the discussion.