Carbon Credits Market
Carbon Credit Markets
Carbon Credit Markets
Carbon credit markets trade “carbon credits,” which are units that represent an emission reduction, avoidance or removal equivalent to one metric ton of carbon dioxide (tCO2e), generated through voluntarily implemented mitigation activities. Emission reductions can be generated, for instance, by destroying methane generated at landfills. Carbon credits can also represent carbon dioxide removals from the atmosphere, such as sequestering carbon through afforestation or directly capturing carbon from the air and storing it. Demand for credits can come from liable entities meeting compliance obligations (under ETSs or carbon taxes that allow the use of offsets), countries meeting Nationally Determined Contribution (NDC) targets under the UNFCCC, corporates purchasing credits to meet voluntary climate commitments.
As a country considers engaging in carbon markets, it must evaluate several factors including potential revenue generation, co-benefits, and long-term advantages, while weighing these against risks such as failing to achieve NDC targets, socio-economic impacts, and reputational concerns.
In addition, a core enabler of high-integrity carbon markets is the underlying market infrastructure—including registries, MRV systems, and transaction layers—which must be designed with transparency, interoperability, and accountability in mind. For more on these foundational elements, see the Carbon Market Infrastructure resource.
The resources outlined in this page are intended to help decision makers, policy practitioners and stakeholders make an informed choice on these considerations.
This document offers structured questions to guide a host country’s carbon market strategy, and a clear entry point to key tools and resources for engaging in carbon markets.
Assessing Readiness
The Mitigation Action Assessment Protocol for International Transfer Readiness (MAAP-ITR) tool assists countries in understanding their level of readiness to participate in carbon markets and to facilitate dialogue between entities development partners and national government authorities by identifying key gaps and capacity building needs, thus helping to develop the necessary institutional framework and market infrastructure for effective carbon market participation
Carbon Market Decision Framework
These cases are perfectly simple and easy to distinguish. In a free hour, when our power of choice is untrammelled and when nothing prevents our being able to do what we like best, every pleasure is to be welcomed and every pain avoided. But in certain circumstances and owing to the claims of duty or the obligations of business it will frequently occur that pleasures have to be repudiated and annoyances accepted. The wise man therefore always holds in these matters to this principle of selection: he rejects pleasures to secure other greater pleasures, or else he endures pains to avoid worse.
1
Is there a substantial opportunity to sell credits in international carbon markets in the context of LTS, NDC and domestic policy settings?
Module 1 supports countries in making an initial decision on whether to participate in international carbon markets as a host country. Understanding the mix of ERR opportunities, along with their costs and co-benefits, can help determine alignment with international demand. Evaluating how these opportunities fit within the country’s NDC targets and /or Long-Term Low Emission Development Strategy (LT-LEDS) can ensure that credit sales support, rather than hinder, reaching these goals.
yes
2
no
6
2
How can host countries approach the decision of whether to authorize credits?
Module 2 addresses the core question of whether and when to authorize carbon credits, thereby converting them into Internationally Transferred Mitigation Outcomes (ITMOs). This involves weighing increased market access against the risk of over-selling—a complex and critical decision that many countries seek support to navigate.
yes
3
no
4
3
How to approach the generation and transfer of authorized credits?
Module 3 explores host country options for generating and transferring authorized credits. It covers, for example, options for credit generation, identifying and selecting buyers, and the necessary infrastructure for tracking and reporting authorized credits (ITMOs).
Click here for more on Carbon Market Infrastructure.
4
How to decide between alternative uses for non-authorized uses?
Module 4 focuses on credits that host countries decide not to authorize for international transfer. It examines whether host countries might seek to influence whether these credits might be sold to international voluntary buyers of credits, as part of a results-based climate finance (RBCF) arrangement with international development partners, or whether the credits may be retained for domestic use.
International Sales ie voluntary market of RBCF
5
Credits for domestic use, e.g. in CPI (if exists and allowed)
6
5
How to approach the generation and transfer of non-authorized credits to international buyers?
Module 5 considers critical policy issues surrounding the international sale of unauthorized credits.
6
How to incorporate domestically generated credits into domestic CPI design?
Module 6 provides guidance on using unauthorized credits domestically, particularly in the context of carbon pricing instruments.
7
What are the key cross-cutting issues that need to be considered?
Module 7 addresses key cross-cutting issues including, for example, institutional and regulatory frameworks, and how to ensure carbon markets deliver high social value.