Introduction to carbon markets

Carbon markets are a mechanism that puts an explicit price or value on carbon emission reductions, or carbon removals from the atmosphere. If designed well, carbon markets can: Incentivise demand for emissions reduction, drive decarbonisation at lowest cost, attract large amounts of private sector capital to emissions reduction and ultimately scale up high integrity climate solutions that will address climate change faster.

As governments and business transition to net zero or negative emissions, there will be circumstances where it’s not possible or not economic to directly reduce on-site carbon emissions to meet short and medium-term objectives. In these circumstances, or when businesses want to go beyond their targets, they can buy carbon credits that represent avoided emissions or emissions reductions – as long as the credits aren’t purchased in order to delay feasible in-house decarbonisation.

Just like a stock market allows the trading of shares, the carbon market provides the means to trade these emission reductions in domestic and global markets. This trading can be compliance-driven (done in order to meet legislated requirements) or voluntary (done to meet voluntary goals).

  • Carbon markets can sit at an international, regional and domestic level, where credits can be generated, bought and sold within national boundaries, but also across national boundaries.

  • Carbon markets take two forms – they are either compliance-driven, or voluntary.

    In compliance-based carbon markets, governments or regulatory bodies set limits on the total amount of emissions that certain industries or businesses can emit. These schemes are usually called emission trading schemes (ETSs). These markets legally require emitters to decarbonise, and for any residual emissions they cannot reduce, they are required to purchase an equivalent amount of carbon credits.

    The voluntary carbon market is a separate system that enables the buying and selling of carbon credits on a voluntary basis and beyond any regulatory requirements (e.g. to reach organisational climate goals).

  • The Australian market’s tradeable commodity is the Australian Carbon Credit Unit (ACCU), with each ACCU representing 1 tonne of carbon dioxide equivalence (tCO2-e) which has been reduced, avoided or removed. The price of ACCUs has seen significant growth over the past decade. This has been supported by an increase in demand over the same period due to the ongoing growth and maturity of carbon markets as well as the rise of net zero targets.

  • A credit is earned by engaging in activities or ‘methods’, which are approved and accepted by different credit marketplaces and carbon crediting schemes. These methods result in the reduction, avoidance or removal of carbon dioxide equivalence (tCO2-e) from the atmosphere. In Australia, the primary carbon credit unit is the Australian Carbon Credit Unit (ACCU) which is a regulated, tradeable financial instrument. An Australian Financial Services Licence (AFSL) is required to buy, sell and trade credits, as well as when providing any financial advice. ACCUs can be traded between buyers in the Australian market, however these units cannot yet be traded internationally. The Australian government has indicated that will consider the international linkage of the Australian market, as well as legislation required to support it.