What are carbon markets and how do they work?

 **What are carbon markets and how do they work?**  

**Type:** Explainer  

**Publication Date:** August 29, 2025  

**Publisher:** UNDP's Climate Promise initiative (a UNDP platform dedicated to supporting climate action, helping over 140 countries and regions advance their climate commitments)

Carbon markets are systems for trading **carbon credits**. These credits represent verified greenhouse gas emission reductions or removals achieved through activities such as protecting forests, restoring wetlands, switching to renewable energy, or improving energy efficiency. Governments, companies, or individuals can purchase these credits to offset their own emissions. Once verified, credits can be traded; after use, they are retired (canceled) and cannot be reused.

There are two main types:

1. **Compliance (mandatory) carbon markets** — Established by national laws or international agreements. Examples include:  

   - EU ETS (launched 2005)  

   - China's national ETS (started 2021, significantly expanded in 2024 to cover ~1/7 of global fossil fuel emissions)  

   - Brazil (legal framework completed in 2024)  

   - New Zealand, South Korea, Switzerland, etc.

2. **Voluntary carbon markets** — Companies, individuals, or governments buy credits to meet voluntary net-zero or reduction targets. Supply often comes from projects like afforestation, forest management, or energy efficiency, frequently benefiting local communities and Indigenous Peoples.

**Why are they important?**  

The Paris Agreement's 1.5°C goal is at risk (current policies could lead to ~3.1°C warming). The climate finance gap is massive. Carbon markets help mobilize funds: in 2024, global carbon pricing covered 28% of emissions and generated over US$100 billion in revenue for low-carbon transitions, sustainable development, and Indigenous-led climate action. 83% of countries plan to use international market mechanisms in their NDCs.

**Key challenges:**  

- Inconsistent credit quality (nearly 1 billion older credits are questionable)  

- Double counting  

- Greenwashing  

- Potential negative impacts on local communities and ecosystems  

**Solutions:** Adopt high-integrity standards (e.g., ICVCM Core Carbon Principles), robust accounting rules, and strong social & environmental safeguards.

**UNDP's support**  

Through its High Integrity Carbon Markets Initiative, UNDP helps countries design policies, legal frameworks, technical readiness, safeguards, and alignment with Paris Agreement Article 6. Examples:  

- Brazil allocates 5% of ETS revenue to Indigenous Peoples  

- Assistance to Turkey and India in building ETS  

- Cambodia planning compliance + voluntary market investments  

- Ghana, Peru, and Switzerland pioneering Article 6.2 cooperative approaches

Well-designed, transparent, and high-integrity carbon markets are powerful tools to accelerate low-carbon, climate-resilient economies, mobilize finance, promote just transitions, and ensure real benefits for Indigenous Peoples and local communities. With the Paris Rulebook finalized, high-quality global carbon markets are accelerating.

**For companies:** Often used to meet Scope 1-3 targets, improve ESG ratings, or respond to investor/consumer pressure. Many set internal carbon prices to guide investments.

**Basic process:** Select project → Purchase credits (spot or long-term offtake agreements) → Verify and register → Retire credits (to prevent reuse) → Obtain proof of retirement.

**2025-2026 market status (latest trends)**  

The voluntary carbon market is transitioning from quantity-driven to quality-driven ("flight to quality"). In 2025, a "hesitation period" occurred: retirements ~157–211 million tCO₂e (Sylvera ~168 Mt, MSCI ~202 Mt), down 4.5–7% from 2024, but demand for high-quality credits remained stable.

Trading value: ~US$1.0–1.4 billion (some sources show ~6% growth to ~US$1.04 billion), average price ~US$6–7/t, but high-quality credits (e.g., ARR afforestation/reforestation) rose to US$24–26/t or higher.

Supply & demand: Overall surplus (accumulated unretired credits ~1–1.5 billion t), but high-integrity credits (ICVCM CCP-compliant) are limited → price polarization. High-quality removal credits (e.g., DAC direct air capture) reach US$170–500/t.

Positive signals: Corporate climate commitments surged 227%; long-term offtake contract values exploded (~US$12.25 billion in 2025, 3×+ growth from 2024), signaling strong future demand. 2026 recovery expected, with market value potentially reaching US$1.7–2.3 billion (CAGR 21–38% toward tens to hundreds of billions by 2030–2035).

Trends: Preference for nature-based removals (prices rising); tech-based removals (DAC, BECCS) growing fast; compliance needs (e.g., aviation CORSIA) spilling into voluntary markets.

Although 2025 transaction volumes fell ~25%, quality premiums are clear (high-rated credits 30–46% more expensive). The market is maturing toward high integrity, aided by stronger Paris Article 6 rules and ICVCM standard adoption, rebuilding trust.

**Where to buy carbon credits?**  

Options include brokers, platforms, or direct from project developers. Main registries (for registration, verification, retirement):  

- Verra (VCS) — largest market share  

- Gold Standard — strong social co-benefits  

- American Carbon Registry (ACR), Puro.earth (tech removals), Climate Action Reserve, etc.

Trading platforms & brokers:  

- Xpansiv, AirCarbon Exchange (ACX), Intercontinental Exchange (ICE), CME Group — professional exchanges  

- South Pole, ClimatePartner, Regreener, Anthesis, Rabo Carbon Bank — one-stop services for companies  

- Others: Carbonplace, Toucan Protocol (blockchain-related), Abatable, etc.

User-friendly for companies/individuals:  

- Direct offtake contracts with developers (large forestry/renewable projects)  

- Online tools: Terrapass (individuals), Persefoni or other carbon management software integrations

Recommendation: Before buying, confirm credits meet high-integrity standards (e.g., ICVCM CCP, SBTi-approved), check third-party ratings (Sylvera, Calyx Global), and avoid low-quality or controversial projects. Taiwanese companies can use international platforms or local sustainability consultants, while noting tax and reporting requirements.

Despite challenges (greenwashing concerns, oversupply), the voluntary market in 2026 is accelerating toward high-quality, removal-focused credits — a key tool for corporate net-zero goals. Demand is strong, prices are polarizing; prioritize credits with robust safeguards for real emission reductions.

**Taiwan-specific note**  

From 2025, Taiwan's FSC mandates all listed companies to prepare and disclose sustainability reports (phased application of IFRS S1/S2 standards by capital size).  

When using purchased carbon credits for carbon neutrality or offsetting residual emissions, companies must disclose in reports:  

- Quantity, source (domestic/international), type (removal/reduction), issuing body (e.g., Verra VCS, Gold Standard, MOENV voluntary reduction credits)  

- Whether they meet high-integrity standards (e.g., ICVCM CCP)  

- Original emissions data (cannot hide true emissions; credits are only for residuals after reduction priority)  

- Role of credits in the decarbonization pathway (reductions first, offsets only for residuals)

**ICVCM Core Carbon Principles (CCPs) in detail**  

The Integrity Council for the Voluntary Carbon Market (ICVCM), an independent non-profit global governance body founded in 2021, sets unified high-integrity standards for the voluntary carbon market (VCM).  

Its core tool: the 10 **Core Carbon Principles (CCPs)**, released March 2023 (updated Feb 2024), considered the global minimum quality threshold for carbon credits.  

Programs and methodologies passing ICVCM assessment earn the CCP Label — making high-quality, scientifically sound, socially & environmentally beneficial credits easy to identify.

**Three categories + 10 principles (official definitions & explanations)**

**A. Governance** — Ensures the system is trustworthy, transparent, and traceable  

1. Effective governance: Programs must have transparent decision-making, accountability, continuous improvement, and quality controls → prevents conflicts of interest and ensures independence/professionalism.  

2. Tracking: Use registries to uniquely identify, record, and track all credits → each tonne has a unique serial number to prevent fraud/reuse (e.g., Verra/Gold Standard centralized or blockchain registries).  

3. Transparency: All certified activity info must be fully public, electronic, and accessible to non-experts → buyers/public can easily review project docs, methodologies, verification reports.  

4. Robust independent third-party validation & verification: All activities require strict independent third-party validation and verification → eliminates self-auditing and ensures data integrity.

**B. Emission impact** — Ensures real, additional reductions/removals  

5. Additionality: Reductions/removals must be "additional" — would not occur without carbon credit revenue → core & most contested principle; ICVCM accepts investment/barrier/common-practice analyses if rigorous.  

6. Permanence: Reductions/removals must be permanent; reversal risks (e.g., forest fires) require mitigation & compensation → nature-based solutions need buffer pools (≥20%) or insurance; tech removals (DAC) have higher permanence.  

7. Robust quantification: Use conservative, comprehensive, science-based methods to avoid overestimation → includes baseline setting, leakage, uncertainty deductions, and all major emission sources.  

8. No double counting: Same reduction counted only once (issuance, claiming, or use) → covers double issuance/claiming/usage; critical for Paris Article 6 cross-border trades with corresponding adjustments.

**C. Sustainable development** — Ensures benefits to people & planet  

9. Sustainable development benefits & safeguards: Programs must provide clear guidance, tools, and compliance procedures to meet/exceed international best practices for social/environmental safeguards (labor rights, Indigenous FPIC, no forced displacement, biodiversity protection) and actively deliver verifiable co-benefits → not just "do no harm," but positive impacts.  

10. Contribution to net-zero transition: Projects must not lock in high-emission technologies/practices incompatible with 2050 net-zero → e.g., no new coal plants or fossil facilities incompatible with renewables; must support genuine transition pathways.

**Practical application & importance**  

CCP Label: Only assessed programs/methodologies get the label. As of early 2026, Verra, Gold Standard, etc., have many methodologies approved; high-quality removal credits (ARR, tech CDR) increasingly labeled.  

For buyers: CCP-labeled credits reduce greenwashing risk, boost ESG report credibility, and align with SBTi, Science Based Targets for Nature, etc.  

For developers: High-quality credits command higher prices (30–100%+ premium).  

Link to Paris Agreement: CCPs highly compatible with Article 6; many countries reference them for international market participation.

Official source: UNDP Climate Promise website (https://climatepromise.undp.org/news-and-stories/what-are-carbon-markets-and-how-do-they-work)