Welcome to our series on understanding carbon markets and carbon credits. In these posts, we’ll break down complex topics to help you gain a clearer view of (1) how carbon markets work, (2) the different types of carbon credits, (3) what makes a high-quality carbon credit - and why these tools matter for climate action. Let’s have a closer look at the different types of carbon markets: Compliance and Voluntary!

Extreme weather, wildfires, ocean acidification and heat waves. Our climate is in crisis and the science is clear: global temperatures are rising and human activities are driving this change at an unprecedented rate. Now we need to reduce greenhouse gas (GHG) emissions and remove excess CO₂ from our atmosphere - but how?

This is how the idea of carbon markets emerged: put a price on GHG emissions so heavy pollution has consequences, and climate action is rewarded. These markets will then promote climate-friendly behavior, pushing countries and businesses to integrate climate action into their operations.

- Greenhouse gases (GHGs) are heat-trapping gases that contribute to global warming and climate change. The primary GHGs include Carbon Dioxide (CO₂), Methane (CH₄), Nitrous Oxide (N₂O), and Fluorinated Gases, and are often measured in CO₂ equivalents (CO₂e) to capture their combined impact on warming.

How do carbon markets work?

In short, carbon markets are trading systems that create economic incentives for reducing and removing greenhouse gas emissions. Through these markets, companies, industries, and governments can invest in certified climate action to take responsibility for the emissions they still generate, or have emitted historically. Taking responsibility is an essential part of addressing climate change, and carbon markets (although not perfect) provide a structured way to do so.

The landscape of carbon markets can be complex, with two primary types - compliance markets and the voluntary carbon market - each serving different roles. Let’s take a closer look.

What is the compliance market?

The compliance markets are regulated trading systems where emission allowances are sold and bought as a result of regional, national and/or international policies. An emission allowance (not to be confused with a carbon credit, which represents one tonne of CO₂ reduced or removed) represents the legal right to emit one tonne of CO₂ e.

- A unit (noun) representing the legal right to emit one tonne of CO2 e. Sometimes referred to as emission permits. Allowances are linked to compliance markets, which are regulated by law.
- A unit (noun) representing one tonne of CO₂ reduced or removed. Sometimes referred to as climate credits or carbon units. Linked to the Voluntary Carbon Market (VCM), which is voluntary.
- A specific use (verb) of carbon credits, where the aim is to compensate or counterbalance for an organisation’s residual emissions by purchasing carbon credits. This has often been part of a strategy to claim to be “carbon neutral”.

Participants, typically large emitters such as power plants and manufacturing facilities, are legally required to manage their emissions. They can meet these requirements by reducing emissions directly or by purchasing allowances to cover any emissions above their allocated limit.

Allowances are typically issued by governments or regulatory bodies as part of a cap-and-trade program, such as The European Union Emissions Trading Scheme (EU ETS).

In a cap-and-trade system, the overall volume that may be emitted by companies is limited by setting a “cap” on the total allowable emissions. Within the cap, companies receive, or purchase, emission allowances, which they can trade as needed. The cap decreases every year, ensuring that total emissions fall. Failing to comply can result in fines, while excess allowances can be sold to those who exceed their allowance, creating a financial incentive for reducing emissions.

Compliance market figure — *Figure 1: Compliance markets are regulated trading systems where emission allowances are sold or bought*

For example, in the EU, all ships need to comply with the EU ETS. Failing to comply incurs a penalty of 100 Euros per tonne of CO₂, while still having to deliver the required allowances. If a ship fails to comply for two consecutive periods, it will be banned from trading within the EU. In other words: compliance markets have real consequences.

Compliance markets cover 98% of total carbon trade, and are primarily focused on large emitters and specific industries. This leaves a small, but important, gap for other businesses and individuals looking to take climate action, which is where the voluntary carbon market comes into play. Despite its small share in carbon trading overall, the voluntary carbon market enables businesses to go beyond their mandatory decarbonization efforts and drive important climate action - fast.

The voluntary carbon market enables businesses to go beyond their mandatory decarbonization efforts and drive important climate action - fast.

What is the voluntary carbon market (VCM)?

The voluntary carbon market, or the VCM, refers to the issuance, buying and selling of carbon credits, on a voluntary basis. The VCM allows businesses of all sizes to contribute to global climate action by supporting climate mitigation projects outside of their core business. This is the market that Noora operates in.

The current supply of voluntary carbon credits comes mostly from private entities (such as Noora) that develop carbon reduction or removal projects - like planting trees, switching to renewable energy or restoring peatlands. You can read more about the different types of carbon projects here.

The projects must be certified according to science-based methodologies to ensure that their climate impact is real, accurately quantified and additional - meaning that they deliver a benefit that would not have happened without carbon revenue. Carbon credits are certified and issued through a carbon crediting program, only after the mitigation activity has been verified and validated by an independent third-party auditor.

The voluntary carbon market is a market where carbon credits are sold and bought on a voluntary basis.

The carbon crediting programme ties everything together, and consists of recognized methodologies, approved third party verifiers and a registry. The largest carbon crediting programme is The Verified Carbon Standard (Verra), followed by The Gold Standard. Several other standards have also been developed, creating complexity in the market. In Noora, we follow the Verified Carbon Standard, while we await the implementation of EU’s upcoming Carbon Removal and Carbon Farming Certification (EU CRCF) regulation and registry.

The VCM has faced its share of controversy, facing criticism for inconsistent carbon credit quality and accusations of greenwashing, leading to mistrust and buyer hesitancy. Over nearly two decades, instances of misconduct have surfaced, ranging from the outrageous - such as credits being sold for projects that never existed - to overestimating the additional climate benefit or failing to deliver the promised outcomes. These scandals have highlighted the fragility and complexity of the market - driving the demand for new standards and more transparent monitoring and reporting.

Fortunately, the landscape is evolving rapidly to tackle these challenges. Acknowledging that some projects involve temporary solutions or carry inherent uncertainties, the market is moving towards more robust frameworks that factor in durability and risk. A key milestone in this evolution is the upcoming implementation of the EU Carbon Removal and Carbon Farming Certification (CRCF) regulation and registry. This initiative aims to establish comprehensive quality criteria, bringing greater credibility and trust to carbon credits across Europe.

Why should we care about the VCM?

The voluntary market allows non-state actors to make a meaningful contribution to the health of the planet in a measurable, verifiable way. In addition, private capital in VCM has the potential to flow faster than many other funding sources. When businesses invest significantly in carbon removal and reduction projects, it sends a strong demand signal, accelerating the growth of climate solutions. These investments create immediate climate action - which we need more than ever.

The voluntary market allows non-state actors to make a meaningful contribution to the health of the planet in a measurable, verifiable way.

Both the compliance and voluntary carbon market play important roles in driving climate action. Together, they contribute to the larger goal of addressing climate change, enabling companies and countries to take responsibility for their climate impact - not as an excuse for inaction within their own value chain, but as a way to demonstrate real commitment to a sustainable future!

Noora empowers businesses to take meaningful climate action through certified carbon credits from Norwegian forests. By partnering with local forest owners and using advanced monitoring technology, we help protect and enhance nature’s role in removing CO₂ from the atmosphere - while contributing to local environmental responsibility and our shared, global climate goals.

Are you a forest owner interested in generating carbon income, or a business looking to make a measurable impact on climate? Get in touch with us to learn more!

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Carbon markets: Compliance vs. Voluntary