Voluntary Carbon Market vs. Regulated Carbon Market: key differences

3 min read
February 7, 2023 at 1:17 PM
Voluntary vs. Regulated Carbon Markets: Understanding the differences

Two different market-based approaches exist to set a price on carbon and push companies to decarbonize. 

Companies considered high-polluting, fall under the Regulated Carbon Market and are subjected to a CO emissions quota. All companies can also voluntarily contribute to projects avoiding or capturing carbon emissions to account for their own footprint. 

  • Created after the Kyoto Protocol in 1997, the Regulated Carbon Market sets a limit on the number of tonnes of CO₂ heavy polluters can emit. Carbon allowances can be sold by companies which did not exceed their quotas and bought by those which have exceeded their cap. 
  • Initiated under the UNFCCC in 2000, the Voluntary Carbon Market allows organizations and individuals with CO₂ emitting activities to take voluntary climate action by privately contributing to certified carbon removal and avoidance projects.

For more information on Carbon Removal Methods, download our guide. Both markets were designed to set a price on carbon, but they function differently. The object of this article is to compare their main characteristics.

Different Market Structures 

The Regulated Carbon Market 

The structure of the Regulated Carbon Market is based on a ‘cap and trade’ system. A number of quotas is allocated to the regulated companies and can be exchanged between the market players. The total number of quotas allocated represents the market cap. The list of companies is defined by the European Union. One quota is equivalent to one tonne of CO₂ and regulated companies can sell or buy quotas between them to comply with their limit. 

It is a regulated market: the quota price depends on offer and demand. Government-supervised registries and non-compliance penalties have been implemented to ensure compliance and transparency. For instance, in the case of the European Union Emission Trade Scheme (EU ETS), the common European Registry has been implemented and a penalty of €100/t has been set. Storage of quotas is also authorized, but only under governmental monitoring.

The Voluntary Carbon Market

The Voluntary Carbon Market includes: 

  • Project carriers which develop projects that avoid or capture CO2 emissions.
  • Companies willing to compensate their carbon emissions beyond their own value chain.
  • Intermediaries connecting project carriers and companies.

Once certified by a recognized standard, the projects deliver carbon credits, issued in a public registry. One carbon credit is equivalent to one tonne of CO2 either avoided or captured by the project. The price of the carbon credits is defined by the project carrier. It is an over-the-counter market. 

For a deep-dive on this topic, be sure to watch our webinar: From Carbon Offsetting to Climate Contribution


Different Levers for Decarbonization

The Regulated Carbon Market

First, the cap-and-trade system pushes companies to decarbonize as it sets a limit on the polluting capacity of regulated companies. Second, since 2012 the number of freely allocated quotas has been progressively reduced. Some industries operating within the Regulated Carbon Market need to buy quotas to pollute: it is the polluter pay-principle.

To buy these quotas, auctioning rules have been implemented. By 2034, all quotas in the market will be auctioned meaning that for every tonne of carbon emitted within the EU from regulated companies, a carbon price will apply. 

The Voluntary Carbon Market 

The carbon reduction projects on the Voluntary Carbon Market avoid or capture CO2 emissions. They are classified under several project typologies, such as forestry & land use, renewable energy, energy efficiency & fuel switching, household devices, agriculture, water management, and waste management.

International standards (Gold Standard, VCS, etc.) set guidelines and methodologies to certify projects, which are assessed by independent third parties. Organizations thus choose projects most aligned with their environmental and social goals. 

Main Advantages and Limitations

The Regulated Carbon Market 

The Regulated Carbon Market is a powerful climate policy tool. All participants are obligated to comply with its rules. As soon as the price of carbon is high enough, as it is the case now, companies are pushed to find faster ways to decarbonize. Decarbonization becomes a cost-saving measure. 

The two main limits of this market today are the carbon allowances surplus and the leakage risks. 

  • A surplus of quotas means that there is an excessive amount of allowances available on the market pushing the price of the carbon permits down. 
  • Leakage occurs when companies flee to countries with no carbon market regulations to avoid the polluter-pay principle. As a result, countries that are not subjected to such a scheme could attract companies that fear for their competitiveness.

The Voluntary Carbon Market

Whereas the Regulated Carbon Market does not facilitate the financing of climate friendly projects, the Voluntary Carbon Market does. Besides the carbon avoidance or capture, the projects also generate other positive environmental and social impacts linked to the United Nations Sustainable Development Goals, such as gender equality, life-on-land protection, or education. 

The Voluntary Carbon Market valuation reached $2Bn in December 2021 as an increasing number of companies commit to net-zero targets and aim to meet the Paris Agreement’s goals.

However, lack of transparency and poor communication could hinder the development of this market. 

At ClimateSeed, we help our clients measure and reduce their carbon footprint. We also build strong relationships with project carriers that implement projects recognized in the Voluntary Carbon Market to offer our clients high-quality portfolios of certified carbon reduction projects enabling them to decarbonize beyond their own value chain. Discover more here.

Download Guide Methods EN-1