Introduction to Carbon Markets

The carbon market is a transactional system for the buying and selling of carbon credits. These credits are tradable instruments that represent a positive contribution to climate mitigation by certifying the removal or reduction of one metric ton of carbon dioxide equivalent of greenhouse gases (GHGs emissions). The emergence of these markets is a direct response to the global climate crisis and the movement toward net zero, providing a market-based mechanism for participants to trade emission mitigation outcomes. While current interest is high, international carbon markets have been operational since the late 1990s.

Main Objectives of the Carbon Market

The core objective of the carbon market is to combat the climate crisis by removing and reducing GHG emissions in the most economically efficient manner. By establishing a price on emissions, the market incentivizes organizations to:

• Reduce emissions by introducing efficiency measures and investing in clean technologies and processes such as renewables.
• Finance climate mitigation projects by introducing an additional revenue stream that makes those projects economically viable.

Types of Carbon Markets

Compliance Carbon Market (CCM): The CCM is established and regulated by government laws and international agreements, making participation mandatory for designated entities. Voluntary Carbon Market (VCM): The VCM is driven by corporate self-regulation, where organizations voluntarily purchase credits to offset their emissions. This market is motivated by factors such as Corporate Social Responsibility (CSR) goals, ESG Commitments, Net-Zero Pledges, and investor requirements.

Carbon Credits Generation

Carbon credits are generated by eligible projects that can verifiably demonstrate they have reduced or removed GHGs from the atmosphere. A critical requirement for origination is "Additionality" which is the proof that the emission reductions would not have occurred without the revenue provided by the carbon market.

There are well known international carbon crediting programs such as (Verra VCS, Gold Standard, GCC) and domestic schemes such as GCOM in Saudi Arabia witch has the main roles of defining how emission reduction and removal from projects are calculated, maintaining a register of approved projects and issued credits and providing the ecosystem support.

The typical credit origination process is extensive and involves multiple parties, rigorous methodology, and third-party verification to ensure high quality and prevent double counting.

Carbon Credits Utilization

Once credits are generated, they are utilized by being retired from the public registry. Retirement is crucial as it permanently takes the credit out of circulation, ensuring that a single emission reduction is only counted once.