The carbon units in these markets are usually exchanged on a common trading platform, in a way very similar to the trading of company shares or futures contracts for agricultural commodities.

Compliance markets are those that are established in response to particular regulatory requirements for greenhouse gas abatement imposed on industries. Compliance markets include those in the European Union, California and New Zealand.
These markets operate emissions trading schemes in which permits to emit greenhouse gases, along with offsets (see below), are traded among market participants (see Box 3.3).

Voluntary carbon markets cover all payments for third-party emissions reductions (usually called ‘offsets') that occur outside of government regulation. Examples include the offsets that consumers can purchase with airline tickets. Voluntary markets generally involve a direct commercial relationship between the seller and the buyer. That relationship may include an intermediary, such as a bank, broker or other financial institution.

Regulated entities will seek to sell permits if the price of permits is higher than the entity's cost of reducing emissions. This drives the supply of permits.
Penalties are imposed for regulated entities that ‘under-surrender'. The penalties are set at a higher level than the expected compliance costs. Regulated entities have the option of purchasing allowances, reducing emissions, or both, in order to reduce their compliance costs.
Allowances given to covered sectors are either sold freely or sold by auction and can subsequently be traded in the market.
A government sets a cap on emissions (which is usually lower than ‘business as usual' and declines over time) that is designed to achieve a specific emissions reduction target.
The government issues allowances (or ‘permits') up to the cap.
By a specified date, regulated entities must surrender enough allowances to cover their emissions.
Regulated entities will seek to buy permits if the price of permits is lower than the entity's cost of reducing emissions. This drives the demand for permits.
Most emissions trading schemes allow for the use of offsets (for example, abatement that comes from outside of the liable entities, through forestry or farming activities). The offsets provide an additional source of supply.

3.6 International carbon markets

THE ASPERMONT BRAND PORTFOLIO