--- title: what a carbon market actually is canonical_url: https://ensurance.app/guide/what-a-carbon-market-actually-is markdown_url: https://ensurance.app/guide/what-a-carbon-market-actually-is.md subtitle: "a place to trade a tonne — not a hold on the forest, the peat, or the marsh" category: nature-finance --- # what a carbon market actually is *a place to trade a tonne — not a hold on the forest, the peat, or the marsh* A peatland stores carbon because it stays wet. A forest stores it because it is still standing. A tidal marsh stores it because every tide buries last year's growth under new sediment. None of them checks whether anyone has sold a tonne. A **carbon market** is a system for buying and selling tonnes of carbon dioxide equivalent, either as legal permission to emit under a cap or as a credit claiming that a project reduced or removed a tonne somewhere else. It puts a price on one measured part of what a living system does. It does not hold the living system. That distinction matters to anyone deciding what a climate budget actually pays for. This page defines the market, shows where the tonne separates from the forest, peat, or marsh it was counted from, and points to what else is on the table. :::johnson **a carbon credit is one way to pay.** It is not the only way, and it is not a hold on the living system. [see the alternatives to carbon credits →](/guide/alternatives-to-carbon-credits) ::: ## compliance and voluntary carbon markets Every carbon market trades one unit: a tonne of carbon dioxide equivalent (tCO₂e), with methane and other gases converted by their warming effect. What changes is where the tonne comes from and why anyone buys it. There are two families. A **compliance market** starts with a law. A government caps emissions for covered sectors, such as power, heavy industry, and in some systems aviation or shipping, and issues **allowances** up to that cap. Each allowance is a legal permit to emit one tonne. Companies that cut faster sell spare allowances to those that cannot, and the cap tightens over time. The EU Emissions Trading System, the UK Emissions Trading Scheme, and California's program work this way. A **voluntary market** starts with a choice. A project, such as a protected forest, a rewetted peatland, or a cookstove program, measures the tonnes it reduces or removes against a **baseline**: the world it claims would have happened without the project. After a third-party check, a registry issues **credits** for the difference. A company buys the credits and **retires** them, usually to support a claim such as "carbon neutral." No law requires the purchase. | | compliance market | voluntary market | |---|---|---| | Who sets the rules | A government, by law | Standard-setters and registries, by methodology | | What trades | Allowances under a cap | Credits issued to projects | | Why the buyer buys | To stay legal | To support a claim, or to fund the work | | What the tonne measures | Permission to emit within a limit | A reduction or removal against a baseline | | Where the living system appears | Mostly nowhere; the cap covers smokestacks | As the project boundary around the forest, peat, or marsh | The two families overlap at the edges. Some compliance schemes accept a limited volume of project credits, and Article 6 of the Paris Agreement lets countries trade credited reductions with each other. The core distinction still holds. A compliance tonne is a permit. A voluntary tonne is a claim. ## where the tonne stops being the forest A voluntary credit is built by narrowing. Start with a peatland. It holds water, slows flood peaks downstream, filters what reaches the river, shelters species that live almost nowhere else, and keeps its carbon underground only as long as the water table stays up. A methodology draws a boundary, picks the one output it can count, carbon, and compares it with a counterfactual. The credit is what remains. That is useful accounting. It is also a subtraction. Once the credit is retired, the buyer's claim is complete, and the peatland still has to stay wet next year. You might be thinking: isn't carbon the thing the climate needs? For the atmosphere, a tonne is a tonne, which is exactly why it trades. But a forest, a peatland, or a marsh is not a tonne factory. Carbon storage is one flow from a living system that also supplies water, soil, habitat, and protection from floods and heat. Price that one flow, and the rest goes unfunded unless someone else pays. We have written the long version for three living systems: [a carbon credit is not a forest](/guide/a-carbon-credit-is-not-a-forest), [a carbon credit is not a wet peatland](/guide/a-carbon-credit-is-not-a-wet-peatland), and [a blue carbon credit is not a living shore](/guide/a-blue-carbon-credit-is-not-a-living-shore). ## why offsets disappoint When a voluntary credit is used as a **carbon offset**, bought to cancel the buyer's own emissions, it has to pass three hard tests. **Additionality:** would the project have happened anyway? **Leakage:** did the logging or drainage simply move next door? **Permanence:** will the carbon stay stored as long as the fossil emissions it cancels stay in the air? In a 2025 review of twenty-five years of evidence, Romm, Lezak, and Alshamsi concluded that most offset types should be phased out, with money directed to the relatively few high-quality project types. Barbara Haya of UC Berkeley traces the defects to incentives, since sellers, buyers, and intermediaries all gain from more credits, and recommends contributions instead of offsets. These are structural problems, not accusations against the people doing the work. The full evidence, with six tests a buyer can apply, is in [the carbon template biodiversity is copying](/guide/the-carbon-template-biodiversity-is-copying). ## what carbon markets get right The survey of alternatives only works if this page is fair to the market. Compliance markets can cut emissions. A cap that tightens every year, with a price attached, changes what gets built. Voluntary markets have moved money to forests, peatlands, and coasts that had no other buyer, and some Indigenous communities run carbon projects on their own terms. Standard-setters such as the Integrity Council for the Voluntary Carbon Market (ICVCM) and registries such as Verra and Gold Standard have spent years tightening methodologies in response to the evidence. So the objection is not "carbon markets are fake." It is narrower. A tonne is a unit of one service, sold as a claim. It is not a standing commitment to the place that produced it. ## what a carbon market does not buy - **The place.** A credit is a claim on a counted number, not on the land, the water, or the people who look after it. - **The rest of the work.** Water supply, flood buffering, soil, and habitat sit outside the tonne unless another payer steps in. - **Time after the claim.** Once retired, the credit has done its job for the buyer. The forest still has to stand next decade. - **Condition.** A tonne measures change against a baseline, not whether the system is healthy today. ## where this leaves a buyer If you buy tonnes to meet a legal cap, keep buying them. The law asks for tonnes. If you buy tonnes to fund a forest, a peatland, or a marsh, ask whether a tonne is the right instrument for that job. Other instruments already exist: regulation and public finance, Indigenous tenure and direct grants, contribution claims, insetting, beyond-value-chain mitigation, beneficiary-pays bonds, debt-for-nature swaps, nature shares, and money based on living systems. Each does a different job. [The next post surveys them row by row](/guide/alternatives-to-carbon-credits). One of those rows is [*ensurance*](https://ensurance.app/?from=guide), the one we build. It funds the present condition of a named place, such as a watershed, a forest, or a marsh, without selling neutrality. Each place has an agent, an account that holds its funding, and each [certificate](https://ensurance.app/specific?from=guide) is issued one-to-one with that agent. The price is a bridge to the place, never its worth. Ensurance sits beside the other rows, not in place of regulation, public finance, or a tonne a buyer is legally required to retire. If your book already holds carbon, [what a carbon fund actually buys](/guide/what-a-carbon-fund-actually-buys) shows how a hold on the place can sit next to it. ## faq ### what is a carbon market? A carbon market is a system for buying and selling tonnes of carbon dioxide equivalent. Compliance markets trade government-issued allowances to emit under a cap. Voluntary markets trade credits issued to projects for tonnes reduced or removed, which buyers retire to support a claim or fund the work. ### how does a voluntary carbon market differ from a compliance market? A compliance market is required by law: covered companies must hold an allowance for each tonne they emit. A voluntary market is optional: companies buy project credits, measured against a baseline, to support a claim. Compliance trades permits. Voluntary trades claims. ### what does a carbon market not buy? It does not buy the place. A credit is a claim on a counted tonne, not a commitment to the forest, peatland, or marsh that produced it, or to its water, habitat, and condition after the claim. [The survey of alternatives](/guide/alternatives-to-carbon-credits) lists other ways to pay. ## sources Romm, Lezak, and Alshamsi, *Are Carbon Offsets Fixable?*, Annual Review of Environment and Resources (2025). Systematic review of twenty-five years of offset evidence. Barbara Haya, *Quality of Carbon Credit Projects & an Alternative Contributions Approach*, World Bank ABCDE (2025). Incentive structure, over-crediting, and the shift to contributions. Linked versions of both are in [the carbon template biodiversity is copying](/guide/the-carbon-template-biodiversity-is-copying). ## the series 1. [what a carbon market actually is](/guide/what-a-carbon-market-actually-is) 2. [alternatives to carbon credits](/guide/alternatives-to-carbon-credits) 3. [insetting is not an offset](/guide/insetting-is-not-an-offset) 4. [what beyond value chain mitigation actually is](/guide/what-beyond-value-chain-mitigation-actually-is) 5. [a carbon currency is not a forest](/guide/a-carbon-currency-is-not-a-forest) 6. [what a carbon fund actually buys](/guide/what-a-carbon-fund-actually-buys)