Regulated carbon credit markets

Carbon credits markets came about when In 1997, IPCC developed a carbon credit proposal to reduce carbon emissions (widely known as the Kyoto Protocol). There are 192 parties to the Kyoto Protocol, whereby countries are given targeted carbon emissions reductions

1 carbon credit here is equivalent to 1 ton of CO2 in a given year and has an expiry. It acts as a right to pollute for companies. Basically, governments issue a cap amount of permitted carbon emissions to each company. If a company managed to emit less carbon than its permitted level, it could sell those unused carbon credits to other companies that had exceeded their permitted levels (indirectly those companies were taxed for over-pollution). This is known as the cap-and-trade market as illustrated.

The governments would lower the emissions cap each year. That makes the carbon credits more expensive and over time, the companies have an incentive to invest in clean technology as it becomes cheaper than buying carbon credits.

Fig. 4: Regulated (Compliance) Cap & Trade ETS

Fig. 5: Map of ETSs and carbon taxes

Fig. 6: Prices of selected ETSs (2008 - 2021)