Carbon market pricing at a glance

The Kyoto Mechanisms, established by the Kyoto Protocol as a framework for international climate change response, are recognized market mechanisms for fulfilling reduction obligations through Emissions Trading (ET), the Clean Development Mechanism (CDM), and Joint Implementation (JI)

Carbon emissions trading is the buying and selling of 'carbon emission rights,' which are greenhouse gas emission permits, through the market. The 'market' implies that the price of carbon emission rights is determined by supply and demand within the market rather than being fixed by policy. Among these, the carbon emissions trading market that operates under legal regulations for greenhouse gas reduction is referred to as the 'Compliance Market' or 'Mandatory Carbon Market.

Specifically, a 'Cap-and-Trade Market,' a type of mandatory market, refers to markets formed within nations or regions that have adopted cap-and-trade systems for mandatory reductions. Within the cap-and-trade market, greenhouse gas reduction targets are set for a certain period, and an annual cap on total allowable emissions is established. Each participant (whether at the national, regional, or business level, or entities subject to allocation) is allocated emission allowances (Allowances, allocated emission rights, or permits) and can trade any excess or surplus.

In addition to the compliance carbon market (CCM) that operates under government regulation and control, recognized by the Kyoto Protocol for fulfilling reduction obligations, there exists a 'Voluntary Carbon Market(VCM)'. In the "Voluntary Carbon Market", the participants voluntarily remove (or reduce) GHG and engage in voluntary emissions trading under verification.

While the compliance carbon market requires a considerable amount of time and significant costs for the verification and certification of emission reductions, the voluntary market is relatively less demanding because companies or organizations that voluntarily declare carbon reduction are recognized through purchasing carbon credits after third-party verification of their efforts to reduce GHG.