FINANCE FLOWS: MARKET MECHANISMS
Carbon Markets
Trading systems where carbon credits are bought and sold.
How companies compensate for emissions they cannot yet eliminate.
In 30 Seconds
Carbon markets connect emitters with projects that reduce or remove carbon:
- 1 credit= 1 tonne of CO2 reduced, avoided, or removed
- Voluntary marketsCompanies choose to buy (~$2B in 2023)
- Compliance marketsGovernments require permits (~$900B in 2023)
Key insight: Not all credits are equal. Quality varies enormously – from $2/tonne (questionable) to $400+/tonne (direct air capture). Understanding quality is essential for credible procurement.
Where This Fits
Carbon markets are a finance flow mechanism that enables nature-based solutions to generate revenue:
Physical Service
Carbon sequestration (trees grow, peatlands restored)
Financial Product
Tradeable credits (verified tonnes of CO2)
Carbon markets translate what nature does into payments that flow to land stewards.
Two Types of Carbon Markets
Voluntary Carbon Markets (VCM)
Companies choose to buy
- Size (2023)~$2 billion
- RequirementEntirely voluntary
- Key buyersMicrosoft, Salesforce, Shell
Why they buy: Reputation, stakeholder pressure, genuine climate commitment, net-zero targets
This guide focuses on VCM – where most corporate action and innovation is happening.
Compliance Carbon Markets
Governments require permits
- Size (2023)~$900 billion
- RequirementLegal obligation
- ExamplesEU ETS, UK ETS, California
How it works: Government caps total emissions, companies must buy/trade allowances. Penalties for non-compliance.
Much larger than voluntary, but less dynamic.
How a Carbon Credit Is Born
From project development to retirement
Project Development
Someone develops a project: forest protection (REDD+), clean cookstoves, tree planting, or direct air capture
Methodology Selection
Project follows approved methodology specifying how to measure carbon impact and baseline
Validation & Verification
Third-party auditors verify the project is real and the carbon maths is correct
Registration & Issuance
Registry (Verra, Gold Standard) issues credits with unique serial numbers
Trading & Retirement
Credits trade until a company "retires" them to offset emissions – permanently removing from circulation
The Key Players
Carbon markets have a surprisingly complex ecosystem
Standard-Setters & Registries
The rule-makers and record-keepers
- Verra – Largest registry, 1.3B+ credits issued
- Gold Standard – Premium, strong SDG focus (WWF)
- ACR – American Carbon Registry (since 1996)
- CAR – Climate Action Reserve (North America)
Rating Agencies
The quality assessors
- Sylvera – Rates 300+ projects AAA-D
- BeZero Carbon – Rates 400+ projects
- Calyx Global – 1,000+ ratings, subscriber-funded
Project Developers
The ones building projects
- South Pole – 700+ projects, 50+ countries
- 3Degrees, Pachama, ClimatePartner
- Natural Capital Partners
Governance Bodies
The integrity watchdogs
- ICVCM – Sets Core Carbon Principles
- VCMI – Guides how companies use credits
The Quality Problem
Not all carbon credits are created equal. This is the biggest challenge.
What Can Go Wrong
Additionality Failure
The project would have happened anyway, without carbon credit revenue.
Example: Protecting a forest that was never actually threatened.
Over-Crediting
More credits issued than actual carbon benefit.
Example: Inflated baseline assumptions, optimistic projections.
Permanence Risk
The carbon doesn't stay stored.
Example: A forest burns down, releasing all "sequestered" carbon.
Leakage
Protecting one forest pushes deforestation elsewhere.
Example: Emissions happen anyway, just somewhere else.
How the Market Is Responding
- Rating agencies assess individual project quality (Sylvera, BeZero, Calyx Global)
- ICVCM Core Carbon Principles set minimum quality thresholds
- Premium pricing for high-quality removal credits
- Increased scrutiny from media and NGOs
What Does a Carbon Credit Cost?
What Affects Price
- Project typeRemoval > Avoidance
- Quality ratingAAA commands premium
- Co-benefitsBiodiversity, community add value
- VintageRecent worth more
- RegistryGold Standard premium
Rough Price Ranges (2024)
How Companies Should Use Carbon Credits
The Mitigation Hierarchy
The emerging consensus from VCMI, SBTi, and others:
Best Practices
Do
- • Set science-based targets first – credits don't replace reduction
- • Prioritize quality over quantity
- • Diversify project types
- • Use rating agencies for due diligence
- • Be transparent – disclose what you're buying and why
- • Focus on removals for net-zero claims
Don't
- • Buy cheap credits to avoid hard decarbonisation
- • Assume all credits are equal
- • Claim “carbon neutral” without reduction context
- • Put all eggs in one basket
- • Buy purely on price
- • Skip due diligence
Common Criticisms (And Responses)
"Carbon credits are just greenwashing"
The concern: Companies buy cheap credits instead of reducing emissions.
The nuance: Done badly, yes. Done well, credits fund real climate projects AND companies reduce emissions. The VCMI Claims Code guides responsible use: credits should supplement, not replace, decarbonization.
"REDD+ forests aren't really saving carbon"
The concern: High-profile investigations found some forest projects over-credited.
The nuance: Some projects were poor quality. But rating agencies now flag these. The market is learning. Not all forest projects are bad – due diligence matters.
"The market is unregulated"
The concern: No government oversight means anything goes.
The nuance: It's self-regulated through standards bodies. ICVCM is adding a quality layer. It's imperfect, but improving. Compliance markets show regulation is possible.
Quick Reference
Key Terms
| Term | Meaning |
|---|---|
| Carbon credit | Certificate representing 1 tonne CO2 reduced/removed |
| Offset | Using a credit to compensate for emissions elsewhere |
| VCM | Voluntary Carbon Market |
| VCU | Verified Carbon Unit (Verra's credit) |
| VER | Verified Emission Reduction (Gold Standard's credit) |
| REDD+ | Reducing Emissions from Deforestation and Degradation |
| Additionality | Would the project have happened without credit revenue? |
| Permanence | Will the carbon stay stored long-term? |
| Leakage | Does protecting one area push emissions elsewhere? |
| Vintage | The year a credit was issued |
| Retirement | Permanently removing a credit from circulation after use |
The Future of Carbon Markets
Article 6 Implementation
Paris Agreement rules for international carbon trading are finally taking shape.
Removal-Focused Growth
Tech-based removal (DAC) gaining traction despite high costs.
Regulatory Convergence
Voluntary and compliance markets may merge over time.
Digital Infrastructure
Blockchain registries, tokenized credits, better tracking.
Nature Market Expansion
Biodiversity credits emerging alongside carbon.
The Bottom Line
Carbon markets aren't perfect. They've had scandals, quality issues, and greenwashing concerns. But they're also channeling billions to climate projects, creating price signals for carbon, and evolving rapidly with better standards. For companies serious about climate, understanding how to navigate carbon markets is becoming essential.
The Physical Connection
Carbon markets are a finance mechanism. Nature-based solutions are the physical interventions.
The Connection
NBS (What generates carbon benefit)
- • Woodland creation
- • Peatland restoration
- • Saltmarsh restoration
- • Soil carbon management
Carbon Markets (How it becomes revenue)
- • Woodland Carbon Code credits
- • Peatland Code credits
- • Blue carbon credits (emerging)
- • Soil carbon credits (emerging)
Disclaimer: This content is for general educational and informational purposes only. It does not constitute financial, investment, legal, or tax advice and should not be relied upon as such. Pandion Studio does not provide regulated investment advice. For specific guidance on your circumstances, please consult appropriately qualified professionals.