COMPLIANCE CARBON MARKETS
Compliance carbon markets (CCMs) are implemented and regulated by national or regional authorities. Compliance markets typically utilise cap-and-trade schemes, whereby the cap represents a limit of how many tonnes of CO2 can be emitted by the industries covered in the scheme. This leads to a specific number of tradeable carbon allowances given to each company over a fixed period of time, giving them the legal right to emit an equivalent amount of CO2. In principle, if a company reduces its emissions below the limit, unused allowances can be traded with other companies that require additional allowances.
The price of allowances is determined by the market, so emitters can choose the most cost-effective approach between purchasing allowances and investing in technologies to reduce their emissions. Over time, governments may reduce allowances given to emitters to meet more ambitious emissions targets. This increases the scarcity of allowances, thereby increasing their price. As the price of allowances increases, investing in technologies such as CCS becomes economically more viable for emitters.
Compliance markets, known as emissions trading systems (ETS), are increasing in number and distribution. Based on data from the International Carbon Action Partnership, an estimated 25 national and sub-national ETSs are in force, nine are in development and 14 are under consideration (1).
Currently, there are two large jurisdictions for compliance markets that include CCS protocols – the EU ETS and the California Low-Carbon Fuel Standard (2,3). Cap-and-trade systems in Tokyo and Quebec do not have CCS protocols, but since they operate in countries with CCS activity, CCS could potentially be included in the future (4,5). This was seen in California, which instituted a CCS protocol under the Low-Carbon Fuel Standard years after it launched its ETS (3). Similarly, the EU ETS adopted a CCS directive some years after it was launched.
VOLUNTARY CARBON MARKETS
Voluntary carbon markets (VCM) are created by private organisations and are self-regulated. VCMs underwent record growth last year, and the market could reach US$50–100 billion per year by 2030, driven by net-zero commitments from the private sector (6). VCMs enable investors, governments, non-government organisations and businesses to purchase carbon offsets, called verified emissions reductions (VERs), from project developers and other third parties. VERs are generated by projects that are assessed using greenhouse gas (GHG) reduction methodologies. Projects are then registered in a VCM registry, which tracks the generation of and trade in VERs. As organisations make increasingly ambitious climate pledges, many of them have few cost-effective options to reduce their emissions. Carbon offsets provide companies with a practical and scalable means through which they can achieve emissions reductions. In practice, a company’s carbon offset strategy operates in tandem with efforts to reduce emissions directly.
Figure 18: Worldwide Carbon Markets – Compliance and Voluntary (Source: World Bank 2022)
THE ROLE OF ARTICLE 6
CCMs and VCMs use different standards and systems, meaning that project developers must satisfy the requirements of multiple methodologies for different systems. This diminishes the potential impact of carbon markets, increasing the cost of decarbonising the world’s economy. Article 6 of the Paris Agreement has the potential to overcome this challenge by increasing coordination between governments and the private sector to harmonise project methodologies. Specifically, Article 6 enables countries to trade with one another to achieve their nationally determined contributions (NDC). It has been estimated that US$250 billion per year in savings can be attained by 2030 as a result of Article 6, although this will be much determined by how well it functions (7). In July 2022, the supervisory body responsible for implementing the mechanism for trade under Article 6 was operationalised.
Precedents exist for some market linkages, such as between Switzerland’s ETS and the EU ETS, and between Quebec’s and California’s systems. Other types of overlaps found in markets today see emission allowances traded alongside carbon offsets. For example, California’s Cap-and-Trade Compliance Offsets Program allows entities covered by the cap to satisfy a percentage of their regulatory obligations through the trade of VERs under the Verra registry.
The need to include CCS in Article 6 is underpinned by the fact that carbon dioxide removal (CDR) is vital to unlocking the ‘net’ in net-zero emissions and achieving the 1.5˚C goal of the Paris Agreement. The use of CCS networks can further streamline cost and resource efficiency, especially when planned on a regional or global level.
OUTLOOK FOR CCS IN CARBON MARKETS
CCS plays a versatile role in supplying point-source capture and storage as well as CDR, while offering the capacity to store CO2 over longer and more permanent timeframes than other mitigation/removal options. While the price of a CCS carbon credit will be determined by underlying market supply and demand interactions, credits generated by CCS projects could attain higher values because geological storage of CO2 is much more secure than storage via nature based solutions (eg, storage in trees or soil). Prices of CCS-generated credits could also increase if market participants would be willing to pay a premium for innovative and novel solutions such as DACCS and BECCS, which currently have no methodologies in place. To further unlock and scale up CCS-related climate action in carbon markets, the CCS+ Initiative is working on delivering an integrated methodological framework for generating carbon credits for the full suite of CCS activities for the VCMs and Article 6 (8). The upcoming years will indeed be critical to establishing ways to direct investment and climate finance to CCS, with current thought leadership in academic and industry circles focusing on carbon sequestration/storage units (CSU) and carbon storage obligations (CSO)/carbon takeback obligations as a solution to enhancing the expected value resulting from permanent geological storage (9–11).
 Verra is one of the leading VCM registries with almost 1,600 registered projects.
 [The CCS+ Initiative includes the plus sign to indicate the use of CCS at point-source, CCUS and CDR in carbon markets.
- International Carbon Action Partnership. ICAP ETS map [Internet]. [cited 2022 Aug 4]. Available from: https://icapcarbonaction.com/en/ets
- European Commission. Implementation of the CCS Directive [Internet]. Implementation of the CCS Directive. 2022 [cited 2022 Jun 21]. Available from: https://ec.europa.eu/clima/eu-action/carbon-capture-use-and-storage/implementation-ccs-directive_en
- California Air Resources Board. Carbon Capture and Sequestration Protocol under the Low Carbon Fuel Standard. 2018.
- Bureau of Environment, Tokyo Metropolitan Government. Tokyo Cap-and-Trade Program [Internet]. Tokyo Cap-and-Trade Program. 2022 [cited 2022 Jun 15]. Available from: https://www.kankyo.metro.tokyo.lg.jp/en/climate/cap_and_trade/index.html
- Gouvernement du Québec, Ministère de l’Environnement et de la Lutte contre les changements climatiques. The Carbon Market – a Green Economy Growth Tool! [Internet]. The Carbon Market – a Green Economy Growth Tool! 2022 [cited 2022 Jun 14]. Available from: https://www.environnement.gouv.qc.ca/changementsclimatiques/marche-carbone_en.asp
- The Oxford Institute for Energy Studies. The Evolution of Carbon Markets and their Role in Climate Mitigation and Sustainable Development. New Oxford Energy Forum . 2022 Jun;
- IETA. CLPC_A6 summary_highres no crops. 2019.
- CCS+ Initiative [Internet]. [cited 2022 Aug 12]. Available from: https://www.ccsplus.org/