Key part of green economy, the carbon market can curb the effects of global warming, responsible for the severe climate changes that the world has faced in recent decades.

In the carbon market, the reduction of greenhouse gas emission targets Greenhouse effect (GEE) become credits that are negotiated between nations, companies and people.

It's the perfect marriage between sustainability and economic activities for a new development model.

Find out more about what the carbon market is and how it works, which generated US$ 53 billion in 2020, according to world Bank.

What is the carbon market?

The carbon market is an environment for financial transactions whose main commodity is the compensation and pricing of carbon emitted by various sectors of the economy, such as industrial, mobility, agricultural and logistics.

The excess volume from the reduction in Greenhouse Gas (GHG) emissions, the main one being carbon dioxide – by companies, governments and individuals – generates credits that are traded between countries.

This means that companies and countries that meet or exceed their own targets, regulated by law or international agreements to reduce GHG emissions. Thus, they can sell their carbon credits to companies and governments that failed to meet these targets and emitted more than was established or permitted.

This negotiation has different formats, size and regulation.

Pricing and generation of carbon credits brings economic and innovation advantages to companies, governments and society, stimulating the green economy, the low-carbon economy and the shift to a more sustainable development that causes less environmental impact.

In other words, when companies and governments are aligned with a sustainability they tend to receive more investments, become more valued globally, more competitive and, consequently, invest more in new technologies, creating growth cycles.

The global carbon market was regulated in COP 26 (United Nations Climate Change Conference 2021), which took place in November 2021 in Glasgow, Scotland.

Carbon credit market: what is it and how are they generated?

A carbon credit is a digital certificate that proves the excess reduction in GHG emissions by a company or government. It is a type of seal for environmental “good behavior” that has economic value.

A carbon credit is equivalent to one ton of carbon dioxide that is no longer emitted into the atmosphere. The more a sector, company, project or organization stops this emission, the more credit it will have to negotiate.

A company in the agricultural sector, for example, which generates biogas by treating cattle excrement – which produces highly polluting methane gas – has a carbon credit that can be negotiated with a company in the same sector that does not carry out this treatment and needs to compensate the emission of this pollutant into the atmosphere.

In regulated markets, companies that emit more greenhouse gases than allowed are forced to buy carbon credits from companies that are below this limit. In voluntary markets, these goals are imposed by the company itself.

How does the carbon market work?

The carbon market can be regulated or voluntary. In the regulated market, industry sectors follow the goals established by governments. In the voluntary market, these goals are determined voluntarily by institutions.

A carbon credit is equivalent to one ton of carbon dioxide that is no longer emitted. Prices vary between US$ 1 and US$ 137/tCO2e. Most GHG emissions covered by carbon pricing systems have an average price of US$ 10/tCO2e, according to data from the World Bank.

Pricing your carbon makes the company more attractive and competitive, due to consumer demand for products and services with low GHG emissions, attracts investment in lower carbon products and creates incentives for technological innovation.

The following are carbon pricing instruments:

• Carbon tax: determines an amount that will be paid per ton of carbon generated based on existing taxes. The company decides the quantity to be reduced based on the cost of making this reduction.
• Emissions trading system (SCE): regulatory framework that requires specific legislation and rules. It imposes a limit on GHG emissions and defines permissions or emission rights in accordance with this limit. The quantity is regulated and the price is defined by the market.

Voluntary carbon market

Voluntary carbon markets consist of trading in emissions reductions between companies and people, in order to meet voluntary corporate or individual targets. In other words, companies and individuals determine how much will be reduced.

In this type of market, credits generated by people or companies are certified by companies accredited for this purpose, whose principles vary between certifiers, such as certification standards and registration and marketing platforms.

Although it is less bureaucratic than the regulated market, in the voluntary market the credits generated are not worth reducing the countries' targets.

The main voluntary market is the Chicago Climate Exchange, in the United States.

Carbon market in Brazil

The carbon market in Brazil is being discussed in the Chamber of Deputies with the processing of the draft Law 528/21, which establishes the Brazilian Emissions Reduction Market (MBRE) and provides for the regulation of the purchase and sale of carbon credits in the country.

At COP26 (United Nations Conference on Climate Change), which took place in November 2021 in Glasgow (Scotland), the Brazilian government made a commitment to reduce its greenhouse gas (GHG) and 50% emissions by 2030, based on 2005 emissions.

According to data from National Confederation of Industry (CNI), Brazil was the first developing country to present targets for reducing greenhouse gas emissions.

Carbon market in the world

The objective of the low-carbon economy is to contain global warming and reduce greenhouse gas emissions, promoting changes to implement a new, more sustainable and clean economic development model.

The signatory countries of the Paris Agreement signed the Nationally Determined Contribution (NDC), which corresponds to voluntary commitments created to collaborate with the global goal of reducing GHG emissions.

Currently, 194 countries have NDCs with targets until 2030. Of these, 137 have already made carbon neutralization commitments for mid-century.

World Bank data show that carbon pricing initiatives cover around 21.5% of global greenhouse gas emissions, with 64 initiatives implemented or under study.

Causes of the greenhouse effect

Greenhouse gases act as a blanket that helps keep the Earth warm, preventing heat loss to space. This is a natural phenomenon and helps with environmental preservation.

However, the increase in the emission of these gases due to human action increases the natural phenomenon, which increases the temperature.

The first international treaty to control greenhouse gas emissions was signed in Kyoto, Japan, in 1997, during the 3rd Conference of the Parties to the United Nations Convention on Climate Change.

Currently, the main causes of global warming are the burning of fossil fuels and deforestation.