Types of carbon markets
Introduction
A carbon market is a system that allows countries, companies, or other entities to buy and sell carbon credits representing carbon dioxide (CO₂) emissions reductions. It allows companies to compensate for some of their greenhouse gas emissions by funding projects that reduce emissions elsewhere.
There are two primary types of carbon markets.
- Compliance carbon markets (CCMs)
Compliance carbon markets are marketplaces where regulated entities and countries obtain or trade carbon credits to meet their regulatory obligations.
These marketplaces operate on a cap-and-trade basis. Governments that have adopted emission limits established by the UNFCCC and regulatory organizations set caps or limits on CO2 emissions for specific sectors. The total emissions allowed under the cap are divided into credits (permits). Companies are required to stay within these limits.
Companies that reduce their emissions below their allowance can sell surplus credits, while those exceeding their limits must purchase additional credits1. Compliance carbon credit prices are largely driven by government policy2.
Selling unused permits for profit creates a financial incentive to reduce greenhouse gas emissions. The limits are usually reduced over time to encourage ongoing emission reductions and help meet broader climate goals.
- Voluntary carbon markets (VCMs)
The voluntary carbon market (VCM) is a decentralised market where private actors voluntarily buy and sell carbon credits that represent removals or reductions of greenhouse gases (GHGs) in the atmosphere3.
While companies’ priority must be to decarbonise their own value chains, the VCM provides a way for them to take responsibility for emissions they can’t cut. High-integrity carbon credits allow them to go further, providing finance to critical climate mitigation activities that would not otherwise be viable. Unlike compliance marketplaces, VCMs allow participants to tailor their offsetting strategies to align with specific sustainability goals.
According to cdr.fyi, between November 2023 and November 2024, the number of carbon removal credits sold increased from 700,000($310 million sales) to 12 million tonnes ($3 billion sales), reflecting a significant change in just one year 4.
As of November 2024, the top five purchasers of carbon removal credits were Microsoft (8.25 million), Frontier buyers (details provided below) (0.5 million), Airbus(0.4 million), Equinor (0.33 million) and Amazon (0.25 million).
To join forces in achieving their net-zero emissions goals, tech firms and other companies have come together to form enterprises and engage in carbon credits trading as a collective. One such initiative is Frontier5, founded by Stripe, Alphabet, Shopify, Meta, McKinsey and tens of thousands of businesses using Stripe Climate. Another is the Symbiosis Coalition 6 formed by Google, Meta, Microsoft and Salesforce.
Demand for carbon removal credits in big tech firms is driven by the explosive growth of AI, which requires energy-intensive data centers7 built with carbon-heavy materials like steel and concrete. Data centers are designed to run large-scale operations 24/7, powering thousands of servers and supporting data processing, storage, and networking functions hence use a significant amount of electricity. Since servers generate a lot of heat, cooling systems are essential to prevent overheating. These cooling systems are energy-intensive and can account for a significant portion of a data center’s electricity consumption. Tech companies use the credits to report lower emissions8.
Developing countries are at the forefront of selling carbon credits. According to an article by energy news, Colombia, Kenya, Cambodia, Mexico and Peru are leading in the voluntary carbon credit market, driven by regulatory advancements and investor-friendly policies in the countries.
Next, we explore the different types of carbon offset projects used to generate carbon credits.
Footnotes
A data center is a physical location that stores computing machines and their related hardware equipment. It contains the computing infrastructure that IT systems require, such as servers, data storage drives, and network equipment. It is the physical facility that stores any company’s digital data.↩︎
AI’s Hidden Carbon Footprint: How Tech Giants Are Masking Their Emissions↩︎