How compliance and voluntary carbon markets interact
How do different types of carbon markets interact? And how can they help to increase climate action? This is the topic of a new report funded by the Swedish Energy Agency.
The conditions for emissions trading fundamentally changed when the Paris Agreement rulebook was adopted at COP26 in Glasgow in 2021. The rulebook sets out the conditions for emissions trading between countries within the UN system under Article 6 of the Paris Agreement. But in parallel, international emissions trading is also taking place in other types of carbon markets, both in compliance and voluntary carbon markets.
The Swedish Energy Agency has funded a report examining how different emissions markets interact with each other and how these markets can help to increase the pace and ambition level of global climate action.
The report was released on 21 June and includes, among other things:
- considerations for authorisation of projects that generate carbon credits under Article 6
- an overview of how carbon credits should be reported and which claims buyers of credits can make
- a case study of Sweden's possibilities for approving the sale of carbon credits generated by BECCS projects partially funded by state subsidies.
Voluntary carbon markets would benefit from common guidelines
The report concludes that both compliance and voluntary carbon markets can help countries meet their existing climate goals as well as contribute to raised climate ambition globally. Further, the report argues that both types of markets can coexist but suggests that voluntary carbon markets would benefit from common guidelines.
Different types of emissions markets
There are different types of compliance carbon markets. The EU Emissions Trading System (EU ETS) is a so-called cap-and-trade scheme, whereas the UN's system for international emissions trading, regulated by Article 6 of the Paris Agreement, is an example of a so-called baseline-and-crediting scheme.
The Swedish Energy Agency is responsible for Sweden’s international climate cooperation with other countries under Article 6 of the Paris Agreement. The benefit of acquiring mitigation outcomes (emissions reductions and removals) through Article 6 is twofold, it can contribute to Sweden’s national climate targets as a complementary measure and increase global climate action.
In general, voluntary carbon markets work in a similar way as international emissions trading under Article 6 of the Paris Agreement, with carbon credits issued through baseline-and-crediting schemes.
The main differences are that voluntary markets are unregulated and primarily used by private companies, they are overseen by independent crediting standards instead of the UN, and they lack clear and universal guidelines for what kind of claims a buyer of such emissions credits can make.