Understanding the Carbon Market: How it Works and Why it Matters 

Over the past decade, each consecutive year has set a new record as the warmest in history. The year 2024 was officially the first year to exceed 1.5°C of warming, surpassing the limit set by the Paris Agreement. Severely reducing greenhouse gas emissions is now more critical than ever to mitigate the worst effects of climate change.  Utilizing nature-based solutions is a critical piece in not only reducing global greenhouse gas emissions but removing atmospheric carbon dioxide as well. One of the most promising mechanisms to support this effort is the carbon market, which incentivizes conservation, restoration, and sustainable land management. Understanding how this market works is key to harnessing its full potential in the fight against climate change. 

What is a Carbon Credit?  

A carbon credit represents one tonne of carbon dioxide (or the equivalent amount of another greenhouse gas) that has been either removed from the atmosphere or prevented from being emitted through verified environmental projects. For example, EP Carbon works with project developers around the world to design projects that meet rigorous standards such as the Verified Carbon Standard or The Climate Action Reserve. Developing projects to meet or exceed these standards ensures meaningful contributions to global emissions reductions. These credits serve as a crucial tool in global efforts to mitigate climate change, allowing businesses and organizations reduce their carbon footprint. By purchasing carbon credits, companies can offset emissions they are unable to eliminate through internal reductions, supporting their sustainability goals. In addition to offsetting their own emissions, corporations and investors can use carbon credits to support sustainable initiatives, fund innovative climate solutions, and contribute to the development of a low-carbon economy. 

How are Carbon Credits Generated?  

Carbon credits are generated through projects that either reduce greenhouse gas (GHG) emissions or actively remove carbon from the atmosphere. Several main forest project types include Afforestation, Reforestation, and Revegetation (ARR), Wetland Restoration and Conservation (WRC), and Reducing Emissions from Deforestation and forest Degradation (REDD+). 

Afforestation, Reforestation, and Revegetation (ARR) projects restore degraded land by planting trees, shrubs, or bamboo which absorb atmospheric carbon and store it in their biomass. Since nearly half of a plant’s biomass is made up of carbon, forests can act as effective carbon sinks with the potential to sequester carbon for hundreds of years. These projects are particularly effective in regions where deforestation and land degradation have significantly reduced forest cover. Projects can plant either native or non-native species, however introducing non-native species can negatively alter ecosystem dynamics. Therefore, EP Carbon recommends planting native species to maximize both ecological benefits and the quality of credits generated.  

Wetland Restoration and Conservation (WRC) projects restore the natural hydrological patterns of wetlands, peatlands, and mangroves. When wetlands are drained, soils shift from anerobic to aerobic conditions. The presence of oxygen increases the respiration rate of decomposers, allowing them to break down organic matter more efficiently. Carbon stored in the organic matter is released into the atmosphere as carbon dioxide. Rewetting these ecosystems helps to maximize carbon sequestration by shifting the soils back to anaerobic conditions, slowing organic matter decomposition rates, and preventing organic carbon from being respired into the atmosphere.  

Reducing Emissions from Deforestation and Forest Degradation (REDD+) projects are commonly implemented in areas with high deforestation rates. These initiatives address the underlying drivers of forest loss, such as unsustainable agricultural practices that rely on the conversion of forest to non-forest for crop planting or cattle grazing. In this case, REDD+ projects can provide local communities with improved agricultural techniques that will increase the productivity of their agricultural fields and reduce the need for forest conversion

Compliance vs. Voluntary Markets  

Compliance Markets 

Compliance markets are legally regulated and require companies to participate in carbon trading. Many operate under a “cap and trade” system, where governments set emissions limits, and companies must buy or sell credits depending on their compliance with the cap. A notable example is a cap and trade system established in California in the United States through California’s Global Warming Solutions Act of 2006 (AB 32). Under this system, the state government sets a cap on the tons of greenhouse gases a company is allowed to emit. This allowance lowers over time, forcing the company to reduce their emissions. If a company’s emissions are below their legal allowance, they can sell the surplus allowances as “credits” to companies that exceed their limits. Conversely, if a company emits more than its allowance, it must purchase additional credits or face penalties, creating a financial incentive to cut emissions. This market-based approach incentivizes emissions reductions while providing flexibility for businesses to comply with regulations efficiently.  

Voluntary Carbon Market (VCM) 

In contrast to compliance markets, the Voluntary Carbon Market (VCM) provides a framework through which private entities can invest in carbon credits beyond regulatory obligations. The VCM allows for greater flexibility of carbon projects at scale.  For example, compliance markets are held to a single set of standards: the law. The VCM hosts a plethora of standards that project proponents can choose from, such as the Verified Carbon Standard (administered by Verra) or The Gold Standard. However, a lack of regulation has led to concerns over project integrity. To address this, the Integrity Council for the Voluntary Carbon Market (ICVCM), an independent nonprofit, was established in 2021 to set high standards for project credibility. The ICVCM developed the Core Carbon Principles (CCPs) as a benchmark for quality and created an assessment framework to ensure compliance. The CCPs focus on ensuring carbon projects are transparent, that the credit generation process is traceable and publicly available. Emissions removals must be permanent and additional to removals that would occur if the project was not implemented (known as the baseline). Projects must also employ safeguards to ensure best practices are used to contribute positively to sustainable development goals, such as proactively and frequently engaging stakeholders. Carbon credits available for purchase that meet the CCP standard will be labeled as such. The CCPs ensure that the credits being sold on the voluntary carbon market are generated from high- integrity projects that have real, positive impacts on climate mitigation. . 

Why It Matters 

Additional Benefits of Carbon Projects 

Beyond emissions reductions, carbon projects contribute to biodiversity conservation, improved livelihoods, and sustainable economic development. Reforestation and wetland restoration efforts enhance ecosystem functioning (e.g., the provision of clean water…etc.) and protect wildlife, while many projects provide economic opportunities and resources to local communities.  

For example, REDD+ projects may avoid unplanned deforestation by training local farmers on sustainable agriculture practices, which reduces the need to clear forest for more cropland. This practice not only reduces deforestation but improves the livelihoods of local farmers by helping increase their crop yield. These additional benefits provide additional value beyond the emissions reductions and removals they achieve. 

 In order to maximize the potential benefits of a carbon project, standards such as the Climate, Community, and Biodiversity (CCB) Standard and the Sustainable Development Verified Impact Standard (SD VISta) reward carbon projects for explicitly expanding their impact.  By adhering to these standards, carbon projects can ensure they deliver meaningful environmental, social, and economic benefits, making them more attractive to investors and providing a stronger, more sustainable foundation for combating climate change. 

Urgency of Climate Action 

The global community must accelerate efforts to meet climate targets, and carbon markets play a crucial role in this endeavor by providing a flexible and cost-effective way to reduce greenhouse gas emissions and remove carbon from the atmosphere. In the Paris Agreement of 2015, the global community came together to establish climate goals and outline the level of emissions reductions necessary to reach these goals. Each participating country developed Nationally Determined Contributions (NDC) detailing how they will reach their goals.  Article 6 of the Paris Agreement provides a framework for countries to use carbon markets to meet these NDCs. Today, 83% of NDCs identify carbon markets as a key tool for achieving emissions reductions goals. As countries strive to meet their climate commitments under the Paris Agreement, carbon markets offer a mechanism for balancing emissions reductions across borders. 

As global efforts intensify to limit warming to 1.5°C, carbon markets will play an increasingly critical role in financing sustainable projects and ensuring meaningful emissions reductions. By investing in these markets, businesses and governments alike can drive positive environmental change while supporting economic resilience and social well-being. The path to a low-carbon future requires collective action, and carbon markets offer a powerful means to accelerate that transition, fostering a healthier planet for generations to come.   

  

 

Understanding the carbon market is key to advancing meaningful climate action. EP Carbon helps ensure that every project—whether focused on reductions or removals—meets the highest standards for transparency, integrity, and real impact. Contact us to learn more!