Brief Introduction to Carbon Markets

Carbon markets first emerged through the Kyoto Protocol era, most notably through the Clean Development Mechanism (CDM). The CDM was widely regarded as unsuccessful, but out of that framework emerged the Voluntary Carbon Market, which coordinates the generation, sale, and purchase of carbon offsets to companies that buy them as part of climate commitments, ESG strategies, and public-facing net-zero claims.

Carbon offsets are generally understood as the reduction, avoidance, or removal of a unit of greenhouse gas emissions by one entity that is purchased by another entity to counterbalance its own emissions. Offset projects may include forest conservation, tree-planting, clean cooking interventions, renewable energy, and other project types that claim measurable climate benefits. These projects generate credits, typically denominated in one metric tonne of carbon dioxide equivalent.

Projects that generate credits based on storing carbon in vegetation or soil are often referred to as nature-based offsets. Across the market, project developers design and implement projects; certification or standards bodies approve methodologies and projects; validation and verification bodies assess whether projects meet methodological requirements; registries issue and track credits; and ratings agencies increasingly assess the quality of those credits for prospective buyers.

Individuals, companies, and countries that emit greenhouse gases can purchase credits to reduce their “net” emissions footprint, at least on paper. Some credits are traded in voluntary markets, while others are exchanged through government-created compliance systems such as emissions trading schemes. With the continued development of Article 6 under the Paris Agreement, carbon markets are also becoming more formally embedded in international climate governance.

Carbon markets have long been controversial. Debates about whether they deliver real climate benefits or support sustainable development continue alongside more technical debates over how these markets should be regulated, standardized, scaled, and integrated into national and international policy frameworks.

Curated Explainers

Additionality

One of the foundational concepts behind carbon markets, additionality means that a project is not legally required, not already common practice, and not financially viable without revenue from carbon credits. Put simply, additionality asks whether the intervention would have happened anyway even in the absence of carbon finance.

Additionality has been especially controversial in the case of many renewable energy projects. As renewable energy technologies have become more cost-competitive and as governments have introduced other forms of subsidy and policy support, the claim that a given project depends on carbon revenue has often weakened.

In recent years, it has become increasingly clear that additionality is not simply a binary matter of “additional” or “not additional.” In practice, it often operates along a spectrum, and carbon markets have responded by developing multiple tests and screening frameworks. Even so, accreditation processes still generally result in a binary certification outcome. Ratings agencies have partly filled this gap by trying to capture gradations in quality and risk across different project types and methodologies.

African Carbon Markets Initiative

The African Carbon Markets Initiative (ACMI) was launched at COP27 in Sharm el-Sheikh by the Global Energy Alliance for People and Planet, Sustainable Energy for All, and UNECA. Its launch also involved the Kenyan government and a number of other African political figures, with support from McKinsey. While civil society representation has been limited, the initiative has included representatives from major market institutions, including ICVCM and former Verra leadership.

ACMI’s stated objectives include:

• Growing African carbon credit retirements from roughly 16 MtCO2e in 2020 to approximately 300 MtCO2e annually by 2030, and much higher by 2050.
• Creating or supporting millions of jobs through carbon project development, certification, monitoring, and implementation.
• Improving the quality and integrity of African credits in order to mobilize substantial finance flows.
• Supporting more equitable and transparent distribution of carbon revenues, with a larger share flowing to local communities.

Carbon Credits / Carbon Offsets

At the broadest 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 its own emissions. On a more technical level, offsets are more commonly associated with the Voluntary Carbon Market, while carbon credits may also refer to units traded within compliance systems such as emissions trading schemes. For the purposes of this knowledge hub, these terms are often used interchangeably unless a more precise distinction is necessary.

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

In practice, however, the fact that credits emerge from very different project types means that they carry very different risks. The climate claims attached to credits may vary in strength, the legal and social conditions around the projects may differ sharply, and the destinations of financial flows can be radically uneven across projects that are formally treated as comparable under market rules.

Exactly what a carbon credit is remains an active subject of debate. Legal and regulatory questions continue around whether credits should be treated as commodities, securities, or something else. These debates are not merely technical: the answers may affect how carbon rights are defined, how projects are regulated, and how national legislation engages with international market mechanisms under Article 6.

Compliance Markets

Compliance carbon markets are created and governed by public authorities. They typically operate as systems for trading emissions allowances or carbon-related units within a national or regional jurisdiction and are directly embedded in public regulation.

The most common form of compliance system is an Emissions Trading System (ETS). An ETS incorporates the cost of greenhouse gas emissions into business decision-making by limiting the quantity of emissions covered firms can produce, while allowing the market price of those emissions to fluctuate according to supply and demand. This differs from a carbon tax, which fixes the price directly rather than limiting the quantity. Although carbon taxes are not the same thing as compliance carbon markets, they are sometimes discussed as part of broader compliance carbon policy systems.

Two broad governance models are often discussed in relation to ETS systems: cap-and-trade and baseline systems. Cap-and-trade systems are the most common. Under this model, governments issue a limited number of allowances and the total number of allowances establishes the emissions cap. Firms must hold allowances for their emissions, and the overall cap is generally intended to decline over time.

In contrast, baseline systems set emissions intensity or performance targets. If a company outperforms its required baseline, it may generate tradable credits. China currently operates 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 those in South Korea, California, and the United Kingdom.

These systems are generally not linked to each other, meaning that units in one jurisdiction usually cannot be used in another. Compared with voluntary markets, there is stronger reason to believe that well-designed compliance systems can support emissions reductions, though outcomes vary by design, sectoral coverage, and political context.

Integrity Council for the Voluntary Carbon Market

The Integrity Council for the Voluntary Carbon Market (ICVCM) is an integrity-focused body that has developed the Core Carbon Principles (CCPs), an additional certification layer intended to identify higher-quality credits. The broader idea is that credits meeting CCP criteria will attract a market premium and help satisfy demand for credits that are perceived as more credible.

Integrity initiatives such as ICVCM and the Voluntary Carbon Market Integrity Initiative emerged in response to sustained criticism of projects that failed to deliver meaningful environmental outcomes and, in many cases, were associated with abuses involving local communities and landholders. These initiatives seek to address buyer concerns over whether credits actually represent one tonne of carbon dioxide equivalent, whether project safeguards are adequate, and whether the social and political consequences of projects are being sufficiently accounted for.

They also respond to host-country concerns, including inadequate benefit-sharing, biodiversity harms, misalignment with national policy, and the possibility that exported mitigation outcomes could undermine a country’s own climate commitments.

The ten Core Carbon Principles are organized across governance, emissions impact, and sustainable development:

• 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 attempted to engage with benefit-sharing questions. Although current frameworks are still limited, the Council has signaled that future iterations may include stronger guidance around revenue use and management. At the same time, some proposed requirements related to mandatory benefit-sharing arrangements have met resistance from major standards bodies.

Nationally Determined Contributions (NDCs)

Nationally Determined Contributions, or NDCs, set out countries’ strategies for reducing emissions and adapting to climate impacts under the Paris Agreement. Parties are expected to update their NDCs every five years, with each round intended to represent a progression in ambition.

Each party to the Paris Agreement is expected to translate its NDC into actionable plans and monitoring procedures. Some NDC targets are contingent on external finance and are therefore described as conditional targets. Others are framed as unconditional targets because they are expected to be met without outside financial support.

As countries build frameworks for Article 6 participation, many are prioritizing harder-to-abate sectors within conditional targets while reserving lower-cost mitigation opportunities for unconditional goals. This strategy reflects an effort to participate in international carbon markets without undermining the country’s own mitigation commitments, especially where Article 6 transfers require corresponding adjustments.

Nature-Based Offsets

Nature-based offsets, often framed in carbon market settings as nature-based solutions, generally involve land-sector activities such as avoided deforestation, afforestation, reforestation, restoration, improved forest management, and soil carbon sequestration. These projects claim either emissions reductions or removals and are often promoted as delivering climate benefits alongside biodiversity and community co-benefits.

At the same time, nature-based offsets face recurring constraints around governance, additionality, and permanence. Permanence is especially problematic because land-based carbon storage does not lock away carbon on the same timescales associated with fossil carbon emissions. This creates a significant tension when these credits are used to “offset” fossil fuel combustion.

Nature-based projects also frequently intersect with 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 adding legal, ethical, and reputational risks where community rights are threatened or ignored.

Proponents often argue that nature-based carbon projects can channel climate finance toward rural communities and support more sustainable land-use practices. Critics, however, argue that these goals would often be better pursued through non-market approaches or, at minimum, through far stronger safeguards and benefit-sharing mechanisms than are currently standard.

Permanence

Permanence refers to the risk that carbon which has been counted as stored or sequestered is later released through natural or human-caused disturbances. This is a central challenge for land-based carbon projects because it undermines the idea that reversible biological storage can be treated as fully equivalent to fossil emissions.

In practice, permanence is often managed through institutional design features such as monitoring, liability rules, and buffer pools. Yet these mechanisms do not eliminate the underlying problem. Buffer pools, for example, often function more like insurance than a guarantee, and their adequacy depends on how accurately future risks such as fire, drought, pests, and disease are modeled.

In the context of Article 6 and international carbon markets, permanence becomes a cross-border credibility problem. If credits are to support claims of real, verified, and additional mitigation outcomes, permanence cannot simply be presumed. It must be monitored, tracked, and 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 the enhancement of forest carbon stocks. It was formalized through UN climate negotiations and tied to safeguards and implementation guidance intended to shape how forest-based mitigation is carried out.

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

Critiques and Implications

A major problem lies in the disconnect between REDD+ as a broad policy framework and the ways REDD+ projects have been used to generate credits in voluntary markets. Many such projects rely on baseline scenarios about what would have happened without the project, and these baselines are notoriously difficult to verify in advance.

Another major issue 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, sometimes 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, permanence treatment, exclusive claims to reductions, compliance with law, and, in some cases, demonstration of co-benefits.

Major standards bodies emerged in the wake of the failures associated with earlier Kyoto-era project mechanisms. Today, 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 applicable standards and methodologies. Their work is central to the legitimacy of carbon market claims, yet it also remains part of wider debates over auditor independence, consistency, and institutional accountability.

Verra

Verra manages the Verified Carbon Standard (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 particularly difficult.

Voluntary Carbon Market Integrity Initiative

The Voluntary Carbon Market Integrity Initiative, or VCMI, focuses on demand-side integrity. Its core concern is how companies use carbon credits and what they can credibly claim while pursuing climate targets. 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 goes beyond private voluntary claims and extends into questions of public policy readiness, authorization, and accountability.

Shortcomings

A major controversy is whether 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 across jurisdictions and providers. A third issue is that important metrics can still be defined with substantial flexibility, creating room for selective interpretation and reduced comparability across firms.

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

Glossary