Compliance Market
A regulated market where carbon credits are traded to meet legally binding emission reduction targets.
What is a Compliance Market?
A compliance market, also known as a regulated carbon market, is a trading system established by government policy or international agreements to achieve mandatory greenhouse gas emission reduction targets. Companies covered by these regulations are required to surrender a certain number of allowances (or carbon credits) equivalent to their emissions.
Why is a Compliance Market important?
Compliance markets are a key policy tool for governments to achieve ambitious climate targets. They put a price on carbon, creating a financial incentive for companies to reduce their emissions, innovate in green technologies, and invest in cleaner operations. They are designed to ensure that overall emission caps are met.
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Frequently asked questions
Most compliance markets operate on a 'cap-and-trade' system, where a cap is set on total emissions, and allowances are allocated or auctioned to emitters. Emitters can then trade these allowances, creating a market price for carbon.
Compliance markets typically regulate large industrial emitters, power generators, and other significant sources of greenhouse gases within a defined jurisdiction.
Compliance markets are mandatory and driven by government regulations, whereas voluntary carbon markets are based on voluntary participation by entities seeking to offset emissions or meet sustainability goals.