CARBON MARKET

FUNDAMENTALS
Understanding Terms of Carbon Pricing, Trading,
and Market Mechanisms

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 Additionality

Additionality refers to a standard used to

assess projects aimed at eliminating carbon
emissions. Such a project is considered
additional when it results in decreasing
greenhouse gas emissions in ways that would
not have occurred without it.

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 Abatement

It refers to reducing the amount of GHG emissions

released to the atmosphere and increasing
amounts of carbon sequestered in the
environment via the removal of GHGs already in
the atmosphere.

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Baseline Emissions

The starting point of greenhouse gas emissions

before implementing any strategies to decrease
them. It acts as a reference for tracking
improvements in reducing emissions.

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 Base year

To begin the journey towards net zero and

establish targets for lowering emissions, it's
essential to first determine a starting year. The
annual goals for cutting emissions are then
defined as a portion of the total emissions
recorded in this starting year.
 Biochar

Generating biochar serves as a carbon elimination

strategy. It involves transforming agricultural debris like
corn husks, stems, and leaves into a substance resembling
charcoal through heating, which alters its chemical
makeup. Once CO₂ is captured in this manner, the biochar
can be mixed into soil, acting similarly to fertilizer. This
process effectively secures CO₂, preventing its release even
as the biochar breaks down.
 Cap and Trade

Cap and trade operates as a strategy rooted in

the market to reduce greenhouse gas emissions. A
governing body distributes a finite quantity of
emissions allowances, each permitting the
emission of a defined quantity of greenhouse
gases within a set timeframe. Firms needing to
exceed their emission allowance are required to
buy extra permits from others prepared to sell.
 Carbon Brokers

An individual or company that works with buyers

and sellers of carbon credits to facilitate carbon
trading. Brokers are not themselves regulated, so
buyers and sellers should exercise due diligence
before engaging with a broker.

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 Carbon Credit

A carbon credit is a tradable certificate or permit

that represents the right to emit one metric ton of
carbon dioxide (CO₂) or an equivalent amount of
another greenhouse gas (GHG). Carbon credits
are used in carbon trading systems and are
generated by projects that reduce, avoid, or
remove emissions, such as renewable energy,
reforestation, or carbon capture initiatives.
 Carbon Dioxide

Carbon dioxide is a colorless gas that occurs

naturally in the atmosphere. It is also created
in many industrial processes. Carbon dioxide
is a greenhouse gas and therefore
contributes to global warming.
 Carbon Dioxide
Equivalent (CO₂e)

For each type of greenhouse gas, carbon

dioxide equivalent (CO₂e) represents the
amount of CO₂ that would have the same
warming effect on the earth as that particular
gas. CO₂e offers a unified standard to analyse
the impact of various greenhouse gases on the
climate.
 Carbon Farming

It refers to agricultural practices and land

management strategies that aim to sequester
carbon dioxide (CO₂) from the atmosphere and
store it in soils, vegetation, and biomass. By
enhancing the natural ability of plants and soils to
capture and store carbon, carbon farming helps
mitigate climate change while improving soil
health and increasing agricultural productivity.
 Carbon Footprint

Carbon footprint refers to the total emissions

of greenhouse gases, including both direct
and indirect emissions, linked to a particular
product or action.
Carbon Capture and
Utilization

Technologies designed to capture carbon

dioxide emissions from facilities such as
power plants and manufacturing processes,
transforming them into valuable products.
Carbon Intensity

The quantity of carbon, measured by

weight, released for every unit of
electricity used.
 Carbon Market

Carbon market refers to a trading

mechanism where reductions in carbon
emissions are exchanged, typically
through the use of carbon credits.
 Carbon Offset

Carbon offset refers to the process of

mitigating emissions of carbon dioxide or
alternative greenhouse gases by
implementing reductions to
counterbalance emissions generated
elsewhere, thereby achieving a net neutral
impact on the environment.
 Carbon Trading

Carbon trading involves the exchange of

emission permits within a cap-and-trade
framework. This system enables entities
with excess emissions to buy permits to
emit additional CO2 from those with
emissions below their allocated limit.
 CBAM

European Union's strategy to assign an equitable cost

to the carbon released in the manufacture of goods
with high carbon content imported into the EU. It
aims to promote more environmentally friendly
manufacturing processes outside the EU. The CBAM
will be progressively implemented in tandem with the
reduction of free emission allowances provided by the
EU Emissions Trading System (ETS), facilitating the EU
industry's move towards lower carbon emissions.
 Carbon Finance

It refers to the financial mechanisms, investments,

and instruments that support activities aimed at
reducing greenhouse gas (GHG) emissions or
enhancing carbon sequestration. It encompasses
funding for projects, technologies, and initiatives
that contribute to climate change mitigation, such
as renewable energy, energy efficiency, carbon
capture and storage, and reforestation.
 Carbon Neutral

A business achieves carbon neutrality when its primary

operations do not add any extra greenhouse gas
emissions overall. This status can be attained without
addressing scope 3 emissions, which often constitute the
bulk of emissions for many companies. However, to align
with the Paris Agreement objectives, businesses need to
progress further and aim for net zero emissions.
Carbon Reduction

Carbon reduction involves decreasing the volume

of greenhouse gas (GHG) emissions emitted by a
company. This can include actions such as
transitioning to suppliers with lower emissions or
adopting clean energy sources. Carbon reduction
is an essential phase in the transition toward
achieving net zero emissions.
 Carbon
Sequestration (Removal)

Carbon removal is the process of extracting

carbon dioxide from the atmosphere and storing
it in a way that prevents it from contributing to
climate change.
 Carbon Sink

A carbon sink is a term used to describe a

location or process that absorbs and stores
carbon dioxide from the atmosphere, effectively
removing it and preventing it from contributing to
climate change. This storage helps mitigate the
impacts of greenhouse gas emissions on the
environment.
 Carbon Target

A carbon target refers to a pledge made by a

company to decrease its greenhouse gas
emissions by a specific quantity before a
designated year. This commitment is typically
part of the company's strategy to mitigate its
environmental impact and contribute to efforts to
combat climate change.
 Carbon Tax

A carbon tax is imposed on the carbon emissions

generated during the production of goods and services.
Its primary aim is to reduce overall emissions by
discouraging the consumption of high-emission products
and incentivizing the adoption of cleaner, more
sustainable alternatives. This is achieved through
financial penalties on carbon-intensive activities,
encouraging businesses to innovate and transition
towards more environmentally friendly practices.
 Carbon Leakage

It refers to the situation where efforts to reduce

greenhouse gas (GHG) emissions in one country or
region result in an increase in emissions in another
country or region. This typically occurs when
industries or businesses relocate their production
to regions with less stringent climate regulations,
leading to an overall rise in global emissions
despite local reduction efforts.
Compliance Markets

Compliance markets are carbon trading systems

where the buying and selling of carbon credits or
allowances are regulated by mandatory government
policies, laws, or international agreements. These
markets are part of cap-and-trade or emissions
trading schemes (ETS) designed to limit greenhouse
gas (GHG) emissions by setting a legal cap on the
total amount of emissions a region, country, or
industry can emit.
 COP

The COP (Conference of the Parties) is an annual

United Nations conference focused on addressing
climate change. Leaders from nearly every
country convene to assess the progress made in
reducing emissions and to ensure that climate
targets are being met.
 Corresponding
Adjustments

A mechanism designed to prevent the double

counting of emissions reductions that are
transferred between countries for meeting their
climate targets. Article 6 allows countries to
cooperate through international carbon markets by
trading emissions reductions, but corresponding
adjustments ensure that each reduction is only
counted once, either by the seller (host country) or
the buyer (purchasing country), but not both.
 Crediting period

The crediting period in carbon credit projects refers

to the designated timeframe during which a
carbon reduction or removal project is eligible to
generate and issue carbon credits based on
verified greenhouse gas (GHG) emission reductions
or sequestration. During this period, the project’s
environmental benefits are quantified, monitored,
and validated to produce carbon credits that can
be sold or traded in carbon markets.
Carbon Registries

The COP (Conference of the Parties) is an annual

United Nations conference focused on addressing
climate change. Leaders from nearly every
country convene to assess the progress made in
reducing emissions and to ensure that climate
targets are being met.
 Double Counting

Each carbon reduction should only be counted

once, either by the seller (host country) or the
buyer (purchasing country), but not both. If they
are being counted by both the country or buyer
and seller, then it used to be considered double
counting.
 Enhanced
Weathering

Enhanced weathering is a method of carbon

removal. It involves spreading finely ground rock,
such as basalt, to accelerate the natural
weathering process. This process results in the
permanent removal of CO₂ from the atmosphere
through CO₂ mineralization.
 ERPAs

Emission Reduction Purchase Agreements (ERPA),

a contract between buyer and project developer
for carbon offset credits, no intermediaries.
 Greenhouse Gas
(GHG)

A greenhouse gas (GHG) is a gas that absorbs and

emits radiant energy within the thermal infrared
range, contributing to the greenhouse effect and
consequently global warming.
 Global Warming
Potential

Global Warming Potential (GWP) is a relative

measure of how much heat a greenhouse gas
traps in the atmosphere compared to carbon
dioxide over a specific time period.
 MRV

MRV (Monitoring / Measurement, Reporting and

Verification) is a key component of all carbon projects.
Information from a carbon project is measured /
monitored and reported on a regular basis throughout
the crediting and permanence periods. A verification
stage then validates that a project has performed as
predicted and that anticipated carbon outcomes have
been realised, based on the reporting.
 NbS

Nature-based Solutions projects in areas

such as projects in Forestry, Agriculture and
Blue Carbon.
 Offsetting

Carbon offsetting involves balancing a company's

carbon emissions by removing an equivalent amount
of carbon from the atmosphere.
 REDD+

REDD+ stands for Reducing Emissions from Deforestation

and Forest Degradation, and it is a climate change
mitigation strategy developed under the United Nations
Framework Convention on Climate Change (UNFCCC). The
"plus" in REDD+ extends the concept to include not just
reducing deforestation and degradation, but also:
Conservation of forest carbon stocks
Sustainable management of forests
Enhancement of forest carbon stocks
 Paris Agreement

The Paris Agreement, established in 2015 and ratified by

nearly every nation globally, is a landmark international
treaty aimed at addressing climate change. Its core
objective is to limit the rise in global temperatures to well
below 2°C above pre-Industrial levels, with an aspiration to
cap the increase at 1.5°C.
 Permanence

Permanence is a necessary condition for carbon

projects to demonstrate that carbon credits reflect a
long-term removal of GHGs. For soil carbon projects,
this generally means the continuance of the positive
carbon management practices to ensure that there
are no reversals.
 Permanence period

The Permanence Period refers to the duration for

which carbon sequestration or emissions reductions
must remain intact to ensure that the environmental
benefits of a carbon offset project are maintained. In
the context of carbon credits, the permanence period
defines how long the carbon dioxide (CO₂) or other
greenhouse gases (GHGs) must stay out of the
atmosphere to be considered as permanently
mitigated or removed.
 Reversal

Reversal refers to unintentional or intentional release

of stored or sequestered carbon back into the
atmosphere after carbon credits have already been
issued for the associated emission reductions or
removals. Reversals can undermine the
environmental integrity of a carbon offset project, as
they negate the emissions reductions that were
originally achieved.
 Sequestration

Sequestration refers to the process of capturing and

storing carbon dioxide (CO₂) or other greenhouse
gases (GHGs) from the atmosphere or emissions
sources to prevent them from entering the
atmosphere and contributing to global warming.
 TCFD

TCFD stands for Task Force on Climate-related Financial

Disclosures. It is a framework established by the Financial
Stability Board (FSB) to help companies and financial
institutions disclose climate-related risks and opportunities in
their financial filings. The TCFD framework provides guidance
on how organizations can assess and disclose climate-related
risks and opportunities across four key areas: governance,
strategy, risk management, and metrics and targets. The goal
of TCFD is to promote more informed decision-making and
better risk management in the face of climate change.
 Validation

Validation is the process of assessing and

confirming that a carbon offset project is well-
designed and meets the specific criteria set by a
carbon standard (such as Verra, Gold Standard, or
CDM). It happens before the project starts
generating carbon credits.
 Verification

Verification is the process of checking the actual

performance of a carbon offset project to confirm
that the emission reductions or carbon
sequestration reported by the project have actually
occurred. It takes place after the project is
implemented and typically happens periodically
during the project’s crediting period.
 Verifier

An accredited (reputable, competent) and

independent person or persons with responsibility for
performing and reporting on the verification process.
 Verifier

An accredited (reputable, competent) and

independent person or persons with responsibility for
performing and reporting on the verification process.
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