HomeCarbon markets exist because business, governments and people are recognizing that climate change is a real problem and they are choosing to take action. These groups reduce their GHG emissions in two ways, one by changing their operations so that they emit less GHGs and, two by purchasing verified emissions reductions (VER) on the carbon markets to use as offsets for the GHGs that they continue to emit.
Regulated carbon markets are created when governments bring in regulations putting limits on the amount of GHGs that can be released from specific sectors of the economy into the environment. These caps on GHG emissions are balanced by allowing trading of GHG emissions allowances (or permits), when the regulated entities reduce emissions by more than what they are required to do by law. These excess GHG emissions allowances are bought and sold by other regulated entities in order come into compliance with the GHG emissions limit set by the regulator. In a regulated market, verified emissions reductions – called offset reductions – which meet standards as set by the regulator can be used for compliance with the regulation.
The flexibility created by allowing trading of carbon permits or offsets to meet the government target puts a price on carbon and a carbon market emerges. The idea is that the market will encourage regulated entities to invest in the GHG emissions reduction projects that are the most cost effective and the targets can be met through the lowest cost options.