7 Types of Carbon Trading Explained
Types of carbon trading are; voluntary, compliance, limiting, crediting, regional, international, and inter-participant carbon trading.
The two main types of carbon trading are; compliance and voluntary carbon trading.
This article discusses carbon trading types, as follows;
1). Voluntary Carbon Trading (as one of the Types of Carbon Trading)
Voluntary carbon trading is a type of carbon trading system which is based on the purchase of carbon credits as a tool for offsetting carbon emissions.
In voluntary carbon trading, the funds recovered from sale of carbon credits, are used mainly to finance other environment-friendly and sustainable projects [3].
What this implies is that VCT creates a pathway for effective fiscal support of such sustainable projects, which may include renewable energy, smart grid, sustainable transport, renewable fuel, recycling plant, and sustainable miscellaneous-manufacturing projects.
This system of carbon trading is called ‘voluntary’ because it is flexible compared to the compliance carbon trading system.
The idea behind voluntary trading is to allow unsustainable-but-essential economic activities to continue, while using these projects to fund the establishment of a sustainable circular economy.
It is an ideal type of carbon trading under practical or real-life circumstances, when all factors and limitations involved in the energy transition and decarbonization agenda, are considered.
In a voluntary carbon market (VCM), the main commodity being traded is carbon credits. There are few or no restrictions placed on the amount of emissions produced by any participant, so long as these emissions are fully offset by purchased credits.
Some assumptions in voluntary carbon trading are ecological. The system is designed on the pretext that the ecosystem is capable of sustaining itself through resilience, efficient cycling of resources, and the interaction between carbon sources and carbon sinks.
As such, all greenhouse emissions and their environmental impacts at any given time can be easily reversed in future, by replacing conventional materials and methods with sustainable ones.
In voluntary carbon trading, it is assumed that a certain level of carbon emissions is unavoidable and necessary for economic growth, even with regards to the goal of establishing sustainability.
Lastly, voluntary carbon trading supports the pretext that resource depletion is one of the main causes of all forms of environmental degradation, and is closely linked to climate change, pollution and global warming.
The voluntary carbon market is large and versatile, and includes participants from the public, private, commercial and industrial sectors.
2). Compliance or Enforced Carbon Trading
As the name implies, compliance or enforced carbon trading is a type of carbon trading that is based on mandatory, well-specified policies that aim to control both the cost and the volume of carbon emissions.
These policies are usually developed by the government and enforced through environmental agencies in the corporate space.
In a compliance carbon market, carbon credits are allocated, and the pattern of trading is rigidly dictated using a tool called compliance offsets [1].
Compliance offsets in carbon trading are a type of permit that specifies the economic cost of emissions, as well as the allowable volumetric emission limit for individual participants.
It is an essential part of the cap-and-trade decarbonization approach, whereby regulations are laid down to ensure that emission levels are controlled even while emissions are being paid for.
Most modern carbon tax systems use the compliance type of carbon trading, or at least some of its attributes.
Compliance trading is useful where efforts are concentrated on meeting sustainable development goals regarding environmental protection and carbon neutrality.
3). Limiting Carbon Trading (as one of the Types of Carbon Trading)
Limiting carbon trading is also an aspect of the cap-and-trade carbon removal system.
While it is very similar to compliance carbon trading; limiting trading is more focused on volumetric limitation than social cost of carbon emissions.
Also, limiting carbon trading does not make use of compliance offsets. Rather, it uses conventional carbon taxes that are accompanied by regulations on limitation of carbon dioxide volumetric output.
Limiting carbon trading can be very strict, with penalties for defaulters. However, it can also make use of incentives like free credits and tax waivers, to encourage participants to reduce their emissions [2].
The goal of limiting carbon trading is to slow down the rate of climate change and its associated problems like oil spill, air quality decline, pollution, deforestation and desertification.
4). Crediting Carbon Trading
Crediting carbon trading is the compound name for all types of carbon trading that depend solely or mostly on carbon credits to reduce or offset the effects of carbon emission.
In crediting carbon trading, emission allowances form the foundation of all aspects of the trading scheme, and all measures taken to achieve its objectives.
The uniqueness of crediting carbon trading arises from the fact that it does not always apply direct limits to carbon emissions. Instead, it indirectly limits emission using highly-priced credits.
In order for this type of carbon trading to be effective, precise estimates of carbon emission costs must be acquired by considering the implication of these emissions on the environment, economy, and society; as well as the expenses that will likely be made in order to reverse this implication through environmental remediation or economic re-modelling.
Crediting carbon trade is usually carried out municipally or regionally, although it may also be based on international goals and policies.
5). Regional Carbon Trading (as one of the Types of Carbon Trading)
Regional carbon trading is any carbon trading system or scheme whose relevance and implementation are restricted to a relatively-small and well-defined geographic or socioeconomic region.
It is most common for regional carbon trading to be enforced within a country, in which case it is also referred to as municipal carbon trading.
Other variants of regional carbon trading include sector and industry-based trade systems.
Regional carbon trading is usually applied to meet regional targets, and is very effective in this regard.
6). International Carbon Trading
As the opposite of regional or municipal trading, international carbon trading is concerned with the enforcement of carbon market policies across national and socioeconomic boundaries.
It is effective for meeting goals defined by international protocols, but could be difficult to manage due to differences in economic, social and environmental conditions across such borders.
7). Inter-participant Carbon Trading (as one of the Types of Carbon Trading)
As the name implies, inter-participant trading is a type of carbon trading that occurs among participants in the carbon market.
These participants include various industries, firms and organizations which are all subject to carbon trade regulations.
Inter-participant trading usually takes the form of subsidized exchanges of excess carbon credits, and may be permitted or prohibited based on existing rules in any given carbon market.
Conclusion
Types of carbon trading are;
1. Voluntary Carbon Trading
2. Compliance or Enforced Carbon Trading
3. Limiting Carbon Trading
4. Crediting Carbon Trading
5. Regional Carbon Trading
6. International Carbon Trading
7. Inter-participant Carbon Trading
References
1). Kelly, E.; Schmitz, M. B. (2016). “Forest offsets and the California compliance market: Bringing an abstract ecosystem good to market.” Geoforum 75(2):99-109. Available at: https://doi.org/10.1016/j.geoforum.2016.06.021. (Accessed 4 November 2022).
2). Shi, B.; Li, N.; Gao, Q.; Li, G. (2022). “Market incentives, carbon quota allocation and carbon emission reduction: Evidence from China’s carbon trading pilot policy.” Journal of Environmental Management 319(2):115650. Available at: https://doi.org/10.1016/j.jenvman.2022.115650. (Accessed 4 November 2022).
3). Taiyab, N. (2005). “The Market for Voluntary Carbon Offsets: A New Tool for Sustainable Development.” Available at: https://www.iied.org/14513iied. (Accessed 4 November 2022).
