Efforts to combat climate change require transforming the high-emissions production systems that have dominated since the Industrial Revolution. Fortunately, society has begun to recognize the positive externalities provided by low-carbon and unconventional technologies. However, there are still challenges in creating clear institutional frameworks to push collaboration and drive efficient, rapid climate action.
To date, carbon markets have proven to be a key mechanism for cooperation between countries and companies. These markets operate under the assumption that one ton of CO₂ reduced has the same impact on mitigating climate change, regardless of where the reduction takes place. This allows resources to be channeled into the most cost-effective greenhouse gas (GHG) mitigation efforts, helping achieve global climate goals.
In voluntary markets, buyers purchase emission reduction certificates (or offsets) voluntarily, aiming to meet self-imposed climate targets. There are no penalties for failing to meet these targets. To bring rigor to these markets, various standards have been developed to ensure consistent monitoring and emissions reduction accounting, preventing the overstatement of results. Two of the most widely recognized international standards are the Verified Carbon Standard (VCS) and the Gold Standard. The voluntary carbon market is growing rapidly, with prices ranging from USD 0.45 to USD 50 per ton of CO₂, depending on the project’s type and location, and an average around USD 10 per ton.
In compliance markets, carbon pricing instruments—such as carbon taxes or emissions trading schemes—require companies to reduce or offset their emissions. Regulated entities can fulfill part of their obligations by purchasing certified emission reductions from projects outside the carbon pricing system. Notable examples include the Clean Development Mechanism (CDM) under the Kyoto Protocol (soon to be replaced by mechanisms under Article 6 of the Paris Agreement) and Chile’s domestic carbon market (complementing its carbon tax).
The following figure (not included here) summarizes carbon price references, offering a panoramic view across various standards, carbon pricing instruments, and long-term decarbonization projections.
A prominent trend is that nature-based projects are commanding higher prices. This is partly due to Science-Based Targets guidelines, which prioritize offset certificates linked to carbon removal or sequestration initiatives (e.g., forest restoration and reforestation). These projects also deliver ecosystem services at the project site, so buyers often seek local or regionally relevant projects that offer tangible social and environmental benefits.
Another important trend is the exclusion of certain project types from voluntary market standards due to their growing ubiquity. These projects are no longer deemed “additional”—that is, they do not reduce emissions beyond what would have occurred under a business-as-usual scenario. For example, grid-connected solar, wind, and geothermal electricity generation projects in developed countries are now excluded under the VCS Standard, one of the leading voluntary standards.
In conclusion, carbon markets can help make low-emission projects financially viable, as long as the following elements are in place:
With the right systems in place, carbon markets can remain an effective tool to mobilize climate finance and accelerate the transition to a low-carbon economy.
