Carbon markets put a price on the right to emit. The economic logic is straightforward: if emitting costs nothing, you'll emit; if it costs $100/tCO2, you'll emit less. The implementation has two distinct flavours. Compliance markets — established by governments, where emitters must hold allowances. Voluntary markets — where companies buy credits to offset emissions, often as part of net-zero commitments.
Compliance: the EU ETS
The EU Emissions Trading System (ETS), launched in 2005, is the world's largest carbon market and the template most others follow. It covers ~40% of EU emissions: power, industrial heat, intra-EU aviation, and now maritime (since 2024). Phase 4 (2021-2030) features a Linear Reduction Factor that tightens the cap each year.
- Mechanics: capped supply of allowances each year. Emitters must surrender one allowance per tonne CO2e. Excess allowances can be sold; shortages must be bought.
- Price history: €5-10/tCO2 in early years (oversupplied). Reform from 2018 and tighter caps drove it to €30 by 2020, €85+ by 2024.
- Market Stability Reserve: a mechanism that withdraws surplus allowances if too many accumulate — designed to prevent the early-years collapse.
- Carbon Border Adjustment Mechanism (CBAM): from 2026, imports of cement, iron, steel, aluminium, fertilisers, electricity, and hydrogen pay an embedded carbon price equivalent to the ETS. Designed to prevent 'carbon leakage' to non-priced jurisdictions.
Other compliance markets
California cap-and-trade (linked to Quebec) covers about 75% of CA emissions; UK ETS replaced EU ETS post-Brexit at similar prices; China's national ETS launched 2021, covering power sector only with prices around ¥80/tCO2 (~$11/tCO2). South Korea, New Zealand, and parts of Canada have functioning systems. Africa: no compliance market yet — South Africa has a carbon tax instead.
Voluntary carbon markets
Voluntary carbon markets (VCM) allow companies to buy credits — typically from forestry, renewable energy, or methane capture projects — to offset their own emissions. Standards bodies (Verra, Gold Standard) certify credits. The market grew from ~$0.5bn in 2020 to ~$2bn in 2023, with projected demand of $50bn+ by 2030 — if the credibility issues are solved.
The 2023-24 credibility crisis
A 2023 Guardian / Source Material / Die Zeit investigation found that 90% of forestry-based credits from one of the world's largest registries did not represent genuine emission reductions. The reaction has been swift: Verra revised its forestry methodology, the Integrity Council for the Voluntary Carbon Market (ICVCM) published Core Carbon Principles, and corporate buyers have shifted toward removal credits (which physically take carbon out of the atmosphere) over avoidance credits (which prevent emissions that would otherwise have happened).
Where Africa fits
Africa hosts substantial high-integrity offset potential: reforestation, soil carbon sequestration, mangrove restoration, biochar, direct air capture pilots, and clean cookstoves. The African Carbon Markets Initiative (ACMI), launched at COP27 with Kenya playing a lead role, targets growth from ~$0.2bn in 2022 to $6bn by 2030 in African-sourced credits, with revenue flowing to project communities.
Kenya passed the Climate Change (Amendment) Act in 2023 to formalise carbon-credit trading, with revenue-sharing requirements that aim to send at least 25% of carbon-project revenue to local communities. Whether the framework will produce credits buyers trust — and whether the revenue distribution will hold up under scale — is the open question of the next 3-5 years.
Exercise
Pick a corporate net-zero commitment from a major company. Read their disclosure on how they use carbon credits. Are they buying compliance allowances, voluntary credits, or both? Are they distinguishing between removal and avoidance credits? How does their volume compare to their stated emissions, and what does that say about their actual decarbonisation strategy?