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A balancing act: the use of carbon credits in compliance markets

  • Isobel Sizer
    Policy Analyst
  • Lily Ginsberg-Keig
    Policy Manager
  • Finn O'Muircheartaigh
    Director Policy & Markets
  • Markets and Policy
The first global stocktake, concluding at COP28, is expected to reveal that governments need to accelerate climate action to meet their Nationally Determined Contribution (NDC) targets. To fill the climate action gap, governments are looking to carbon pricing mechanisms. By implementing compliance carbon markets or carbon taxes, governments can encourage decarbonisation and raise climate ambition. Carbon credits are a useful complement to these policies, facilitating climate action, a lower cost of transition, and encouraging green finance while allowing countries to meet their NDCs. This report investigates the use of carbon credits within government policy and the impact of this growth on the voluntary carbon market.

Here are some key takeaways

  • Carbon credits are increasingly used by governments within compliance mechanisms to drive corporate emissions reductions and help to meet NDC targets.

  • The potential demand for carbon credits from compliance markets could represent almost double the amount of the annual demand in the VCM. 

  • Article 6 could catalyse the use of carbon credits within regulated schemes by allowing countries to claim emissions reductions as part of their NDCs.

Contents

  • Introduction

  • What are the drivers of carbon credit use in compliance markets?

  • How are carbon credits used in climate policy?

  • How do carbon credits support government objectives? 

  • How is the growth of compliance credits affecting the voluntary carbon market? 

  • Considerations for policymakers

  • Conclusion

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