How the carbon market works for companies

Find out how the regulated and voluntary carbon markets work, essential for companies to meet greenhouse gas emission reduction targets.

In Brazil, the proposal is to create a regulated model so as not to increase greenhouse gas emissions

The carbon market was one of the main topics of the COP 26 (United Nations Climate Change Conference). Its rules, established in the 2015 Paris Agreement, have been discussed since then, but are not yet in force.

When they actually come into force, countries will be able to establish targets for reducing the emission of gases that cause the greenhouse effect (and increase the temperature on Earth) for different sectors of the economy.

Read too: 4 practices to combat the intensification of the greenhouse effect

Thus, companies, industries, livestock producers, farmers and other sources that emit greenhouse gases will have to comply with the limit established for the emission of carbon dioxide, methane and other gases. And what happens to those who need to exceed this limit, say, to expand their production?

In this case you will need to buy carbon credits, a transaction that takes place in the carbon market. There are several types of carbon markets.

“Everyone’s instrument is the same, for buying and selling carbon credits”, explains Ronaldo Seroa da Motta, specialist on the subject and professor at the Postgraduate Program in Economic Sciences (PPGCE) at the State University of Rio de Janeiro (UERJ).

“What changes is that in the voluntary market, companies negotiate these credits among themselves to meet socio-environmental goals that they themselves establish. In the regulated market, it is the market that calculates the reduction target and distributes emission rights to companies”, adds the professor.

In Brazil, the proposal is to create a regulated market. “It is an instrument to ensure that Brazilian industry does not increase, in aggregate, its emissions and continues to be low carbon”, adds Ronaldo. The regulation of the carbon market in Brazil was proposed in bill 528/2021, currently being processed in the Chamber of Deputies.

The model for the Brazilian market is the Emissions Trading System (SCE), which defines a limit for emissions from regulated sources (such as companies) in each country. The regulator then generates greenhouse gas emission rights compatible with this limit, which can be sold and distributed free of charge to regulated sources.

A company that receives its share of greenhouse gas emission rights can, for example, sell its surplus to others if it falls below the limit that year. And the one that has to emit more gases (in case of increased production, for example) can buy the rights from those who sell, as long as the general limit is respected.

Check out, in the infographic below, how the regulated and voluntary carbon markets work.

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