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Voluntary markets finance reductions; compliance markets mandate them
Introduction
Carbon was once treated as an invisible cost of growth. Today, it carries a price. In 2026, direct carbon pricing covers just over 29% of global greenhouse gas emissions, according to the World Bank, underscoring how quickly emissions are being incorporated into decision-making worldwide.
Yet not every market follows the same path. Some are created by law, while others grow from voluntary commitments. Understanding the types of carbon markets reveals who participates, what is traded, and why the rules differ. As the world builds its carbon market framework, these differences will shape how businesses meet obligations, fund verified reductions, and find value in moving towards a lower-carbon future.
Two types of carbon markets and two ways to cut emissions
From regulatory obligations to voluntary participation, the types of carbon markets shape how emission reductions create value. Compliance and voluntary carbon markets offer different pathways, with distinct rules and purposes. The comparison below brings these differences into focus, from who participates and how markets are governed to how credits are traded and used.
| Parameter | Compliance carbon market | Voluntary carbon market |
|---|---|---|
| Meaning | A government-created market in which covered entities must meet legally binding emissions or emission-intensity requirements. | A market in which organizations or individuals voluntarily purchase carbon credits representing verified emission reductions or removals. |
| Participation | Mandatory for businesses, facilities, or sectors designated as obligated entities under the applicable law. Other participants may be permitted under market rules. | Optional. Buyers may include companies, financial institutions, non-governmental organizations, and individuals seeking to support climate action or address residual emissions. |
| Primary objective | To help regulated entities achieve statutory emissions targets while allowing reductions to occur where they are most cost-effective. | To mobilize finance for climate projects and support voluntary climate commitments that extend beyond, or fall outside, regulatory obligations. |
| What creates demand? | The requirement to surrender eligible allowances or credits by a specified compliance deadline. | Corporate climate strategies, internal carbon targets, supply-chain expectations, climate contributions, and other voluntary commitments. |
| Market design | Markets may use cap-and-trade, which caps allowance supply, or baseline-and-credit, which measures performance against a target. India’s CCTS follows an emission-intensity-based baseline-and-credit approach. | Predominantly project-based and baseline-and-credit. Projects earn credits for verified reductions, avoidance, or removals achieved against an approved baseline. |
| What is traded? | Depending on the system, participants may trade emissions allowances, carbon credits, or both. Under India’s CCTS, one Carbon Credit Certificate represents one tCO₂e of carbon reduced, removed, or avoided. | Project-based carbon credits. Each credit generally represents one metric tonne of carbon dioxide equivalent reduced or removed. |
| How is supply created? | Allowances may be allocated or auctioned under cap-and-trade systems. In baseline-and-credit systems, credits are issued when an entity outperforms its prescribed target. | Credits are issued after a project follows an approved methodology, and its results are validated, monitored, and independently verified. |
| Reduction activities | Industrial efficiency, cleaner fuels, process changes, and other measures undertaken by regulated entities. Some systems also accept approved offset credits. | Renewable energy, methane recovery, energy efficiency, forestry, agriculture, waste management, clean cooking, and engineered or nature-based removals, subject to the chosen standard. |
| Governance and oversight | Governments and regulators define the rules, targets, registries, eligible instruments, and enforcement. In India, BEE administers the framework, CERC regulates trading, and the Grid Controller of India operates the registry. | Usually governed through independent carbon-crediting programmes, standards, methodologies, registries, and third-party verification. Government-operated voluntary crediting mechanisms also exist in some countries. |
| Trading and price discovery | Trading channels are prescribed by regulation. India’s 2026 rules generally provide for CCC transactions through power exchanges, unless another mode is permitted by CERC. | Credits may be transferred through registries and sold directly, through intermediaries, or on marketplaces. Prices vary significantly because credits differ by project, location, vintage, methodology, and quality attributes. |
| How are credits used in carbon markets? | Regulated buyers surrender eligible units to meet their legal obligations. Surplus units may be sold or banked where scheme rules permit. | Buyers retire credits in a registry so that the associated reduction or removal cannot be claimed again. Retirement records support traceability and prevent reuse. |
| Key integrity considerations | Reliable emissions data, consistent target-setting, transparent allocation or credit issuance, effective verification and strong market oversight. | Additionality, accurate quantification, permanence, leakage management, independent verification, transparent registries, and prevention of double-counting. |
| India’s carbon market framework | India’s compliance market requires notified energy-intensive entities to meet greenhouse-gas emission-intensity targets. Those exceeding targets earn CCCs, while those falling short must purchase and surrender them. | India’s CCTS offset mechanism allows non-obligated entities to voluntarily register eligible projects and earn CCCs for verified emission reductions, avoidance or removals within a government-regulated framework. |
| Who participates? | Regulated entities required to meet mandatory emissions or emission-intensity targets. In India, this includes notified obligated entities under the CCTS. | Companies, institutions and individuals participating voluntarily. In India’s CCTS Offset Mechanism, non-obligated entities can register eligible projects to generate CCCs |
| Examples | EU Emissions Trading System (EU ETS) and India’s CCTS Compliance Mechanism. The EU ETS is a mandatory cap-and-trade system, while India’s CCTS uses emission-intensity targets for notified obligated entities | Verra’s VCS and Gold Standard are widely used carbon-crediting programmes in voluntary markets. India’s CCTS Offset Mechanism enables voluntary participation within a regulated framework. |
Bottomline
So, which carbon market truly matters more? The answer is not one or the other. Compliance markets create accountability, while voluntary markets create room to go further. Understanding both helps businesses, buyers, and project developers choose the right route, assess credits with confidence, and recognize where genuine value is being created. As these markets evolve, their biggest opportunity is clear: to make credible emission reductions easier to reward, harder to ignore, and powerful enough to help shape a lower-carbon future.
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Frequently asked questions
The frequently asked questions section is a reliable source for unlocking answers to some of the most crucial inquiries. Please refer to this section for any queries you may have.
- Solaroof
The voluntary carbon credit market enables organizations and individuals to buy carbon credits without a legal requirement to do so. Credits are generated from verified projects that reduce, avoid, or remove greenhouse-gas emissions and are tracked through registries. Buyers may retire these credits to support voluntary environmental commitments. Unlike compliance systems, demand is largely driven by corporate or individual goals, making credit quality, verification, and transparent claims particularly important.
A compliance carbon credit market operates under laws or regulations that require covered entities to meet prescribed emissions obligations. Depending on the system, entities may trade allowances, carbon credits, or other eligible units to achieve compliance. Rules determine who is covered, which units qualify, and how obligations are enforced. In India, the CCTS compliance mechanism sets greenhouse-gas emission-intensity targets for notified obligated entities and allows CCCs to support compliance.
A carbon allowance gives its holder permission to emit a specified quantity of greenhouse gases within a regulated emissions trading system. A carbon credit represents a verified reduction, avoidance, or removal of emissions against an approved baseline. Allowances are generally created and controlled by regulators, while credits are generated by eligible projects or programmes. Credits may serve voluntary buyers or compliance systems when the relevant rules permit their use.
Carbon credit prices are not uniform. They depend on supply and demand, project type, location, vintage, verification standard, permanence, delivery risk, and additional benefits. Eligibility for regulated schemes can also create a price premium. In compliance markets, policy design, emissions targets, and available certificate supply strongly influence prices. Buyers should therefore compare the quality and permitted use of a credit, not judge it only by its price.
Carbon credits are verified through a defined project cycle. A project applies an approved methodology, establishes a baseline, monitors results, and submits evidence for independent assessment. In India’s Carbon Credit Trading Scheme, validation and verification are carried out by Accredited Carbon Verification Agencies. Eligible reductions, removals, or avoidances are reviewed before Carbon Credit Certificates are issued through the Indian Carbon Market Registry, helping ensure that claimed outcomes are measurable and traceable.
Individuals can participate in voluntary carbon markets by purchasing eligible credits and arranging for their retirement or cancellation. The UNFCCC has previously supported voluntary cancellation by individuals as well as businesses. However, access to India’s Carbon Credit Trading Scheme depends on registration, eligibility, and the trading rules applicable to the Indian Carbon Market. Buyers should confirm the registry, ownership record, and retirement process before making any environmental claim.
India’s carbon market has several institutions with distinct roles. The National Steering Committee for the Indian Carbon Market oversees the framework. The Bureau of Energy Efficiency administers the scheme and issues Carbon Credit Certificates. Grid Controller of India operates the registry, while the Central Electricity Regulatory Commission regulates trading and market oversight. Accredited Carbon Verification Agencies validate or verify eligible activities before certificates can be recommended for getting issued
India’s Carbon Credit Trading Scheme, or CCTS, is the framework for the Indian Carbon Market. It includes a compliance mechanism for notified energy-intensive entities and an offset mechanism for non-obligated entities. Under the compliance mechanism, entities must meet prescribed greenhouse-gas emission-intensity targets. Eligible reductions under the scheme can generate Carbon Credit Certificates, which are issued through the Indian Carbon Market Registry and traded on an electronic platform regulated by CERC.
Voluntary carbon markets can help channel finance toward verified emission reductions and removals beyond a company’s own operations. They can support broader decarbonization and, at net zero, high-quality removal credits may help neutralize residual emissions that cannot yet be eliminated. However, carbon credits should complement, not replace, direct emissions reductions. Current SBTi guidance continues to prioritize cutting value-chain emissions while recognizing a supporting role for high-integrity carbon credits.
Once a carbon credit is used to support a claim, it should be retired or cancelled in the relevant registry. This removes it from circulation and helps prevent the same reduction from being sold or claimed again. Registry records connect the credit to its project, owner, and transaction history. Buyers should look for a clear retirement record because simply purchasing a credit does not, by itself, establish that it has been permanently used.
Under India’s offset mechanism, eligible activities may come from sectors including energy, industry, agriculture, waste management, forestry, transport, construction, fugitive emissions, solvent use, and carbon capture, utilization, and storage or other removals. A project does not automatically earn credits because it falls within an approved sector. It must meet the applicable methodology, baseline, monitoring, validation, and verification requirements before Carbon Credit Certificates can be issued.
In voluntary carbon markets, verified carbon credits are issued under recognized crediting programmes and recorded in registries that track ownership, transfers, and retirement. Buyers may purchase credits directly from project developers or through brokers, retailers, and trading platforms. Once a buyer uses a credit toward a climate claim, it is typically retired in the registry so it cannot be transferred or claimed again, helping maintain traceability and market integrity.
Article 6 of the Paris Agreement provides routes for countries to cooperate on emissions reduction. Article 6.2 covers cooperative approaches using internationally transferred mitigation outcomes, while Article 6.4 establishes a United Nations crediting mechanism. Article 6.8 addresses non-market cooperation. These arrangements are not simply another domestic carbon market type. They create an international accounting framework intended to support cooperation, transparency, and the avoidance of double-counting.
Buying carbon credits should not replace efforts to reduce an organization's own emissions. The UNFCCC has stated that voluntary carbon markets should supplement, rather than substitute for, direct reductions. A credible approach begins with measuring emissions, setting reduction priorities, and acting across operations and value chains. High-quality credits can then support verified reductions or removals, particularly for emissions that are difficult to eliminate immediately, provided claims are transparent and accurately framed.
Carbon trading is legally recognized in India through the Carbon Credit Trading Scheme notified under the Energy Conservation Act framework. The scheme establishes compliance and offset mechanisms, assigns institutional responsibilities, and provides for Carbon Credit Certificates to be issued through the Indian Carbon Market Registry. CERC’s 2026 regulations create the framework for their purchase and sale. Actual participation must still follow registration, eligibility, verification, and trading requirements.
Sources
1. Carbon market – Bureau of energy efficiency
2. State and Trends of Carbon Pricing 2026
3. What are carbon markets and why are they important?
4. The Voluntary Carbon Market Explained
5. About Emissions Trading Systems
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