Carbon markets are trading systems that put a price on greenhouse gas emissions, and they come in two flavors: compliance markets, where governments force polluters to buy permits for every ton they release, and voluntary markets, where companies choose to fund emission-reduction projects and buy credits to offset their footprint. Prices range from roughly $1 per metric ton for the cheapest voluntary credits to more than $500 per ton for cutting-edge carbon removal. Understanding which market you are dealing with, and what backs the credit you are buying or selling, is the difference between a defensible climate claim and an expensive greenwashing problem.
How Compliance Markets Work
A compliance carbon market runs on cap-and-trade. The government sets a firm ceiling on total greenhouse gas emissions for covered industries, divides that ceiling into individual allowances, and requires regulated companies to hold one allowance for every metric ton of carbon dioxide equivalent they emit. Cut your emissions below your limit and you can sell the surplus. Come up short and you have to buy more at auction or on the open market.
The cap shrinks on a preset schedule each year. Supply tightens, prices rise, and the financial case for investing in cleaner technology grows stronger than the case for buying ever-more-expensive permits. Companies track their emissions, report them to regulators, and surrender the matching allowances by a compliance deadline.
The European Union Emissions Trading System is the longest-running example, operating since 2005 across EU member states plus Iceland, Liechtenstein, and Norway. It covers power plants, heavy industry, intra-European aviation, and maritime transport. Allowances traded around €75 per metric ton in mid-2026. A company that fails to cover its emissions pays €100 per uncovered ton, adjusted upward for inflation, and still has to surrender the missing allowances the following year.1Environmental Protection Agency (Ireland). Stationary Operators – EU ETS Compliance
The United States has no single federal program. California runs the largest state-level system, with a joint allowance auction shared with Québec and recent settlement prices around $28 per ton.2International Carbon Action Partnership. USA – California Cap-and-Invest Program The Regional Greenhouse Gas Initiative covers power-sector emissions across several northeastern states. Washington State launched its own program in 2023, with noncompliance penalties reaching $10,000 per violation per day.3Washington State Department of Ecology. Cap-and-Invest China operates the world’s largest compliance market by volume, though its coverage and price levels differ substantially from Western systems.
How Voluntary Markets Work
Voluntary markets exist for buyers who want to offset emissions without being legally required to. A company chasing a net-zero pledge or investor expectations might fund a reforestation project, a methane-capture system at a landfill, or a renewable energy installation in a developing country. In return, it receives carbon credits, each representing one metric ton of CO₂ reduced or removed.4S&P Global. Voluntary Carbon Markets: How They Work, How They’re Priced and Who’s Involved
The critical distinction from compliance allowances is that voluntary credits are project-based. Rather than buying a permit from a government-managed pool, the buyer funds a specific activity that cuts or captures emissions. That difference drives the wide price spread across the voluntary market, since project quality, permanence, and co-benefits all vary.
Voluntary credits are not interchangeable with compliance allowances. A company regulated under the EU ETS cannot surrender voluntary offsets in place of government-issued allowances. Compliance markets enforce a legal ceiling on emissions. Voluntary markets channel private money toward additional projects. Some companies use both, buying compliance allowances where required and adding voluntary credits to address emissions their regulatory obligations don’t cover.
What Makes a Carbon Credit Legitimate
Not all credits hold up under scrutiny. The Integrity Council for the Voluntary Carbon Market released its Core Carbon Principles as a shared quality benchmark, laying out ten requirements.5ICVCM. The Core Carbon Principles Three concepts sit at the heart of the quality question:
Additionality. The emissions reduction would not have happened without revenue from selling credits. A forest that was never at risk of being cut down doesn’t generate additional climate benefit just because someone labels it a carbon project. This is the criterion that sinks the most credits when examined closely.
Permanence. The stored or avoided carbon has to stay out of the atmosphere. A forest can burn down, releasing everything it sequestered. Registries address this risk through buffer pools, where a percentage of credits from each project is set aside in a reserve account to compensate for reversals.6American Carbon Registry. ACR’s Approach to Non-Permanence Risk Mitigation The American Carbon Registry’s buffer balance represents roughly 20 percent of total credits issued from projects that carry reversal risk.
No double counting. The same ton of reductions cannot be claimed by both the project’s host country toward its national climate target and a private buyer as an offset. Article 6 of the Paris Agreement addresses this at the country level, and credible registries enforce it at the project level.
Registries such as Verra and Gold Standard maintain public ledgers that track every credit from issuance through to retirement. When a buyer uses a credit, the registry marks its unique serial number as retired, permanently removing it from circulation so it cannot be sold twice.7Verra. Verra Registry Overview
Corporate climate frameworks limit how far offsets can carry a company. Under the Science Based Targets initiative’s net-zero standard, a company must first cut at least 90 percent of its emissions through direct operational changes before it can use permanent carbon removal to neutralize residual emissions.8Science Based Targets Initiative. The Corporate Net-Zero Standard Offsets are not a substitute for cleaning up your own operations.
What Carbon Credits Cost
Prices split cleanly along the compliance-versus-voluntary line, and within the voluntary market they range across nearly three orders of magnitude.
In compliance markets, allowance prices reflect the regulatory design and economic conditions of each program. EU ETS allowances traded between €65 and €75 per metric ton in 2026. U.S. regional programs price lower: California’s joint auction with Québec has cleared around $28 per ton, and the Regional Greenhouse Gas Initiative has historically cleared at considerably lower levels.
Voluntary market prices are much more varied:
- Renewable energy and industrial credits: as little as $1 per ton
- Nature-based credits from forestry and land use: generally $5 to $24 per ton, with avoided-deforestation credits at the lower end and reforestation removal credits toward the higher end
- Biochar credits: around $177 per ton on average
- Enhanced rock weathering: above $200 per ton
- Direct air capture: regularly above $500 per ton
The gap between the cheapest and most expensive credits reflects the market’s assessment of quality, permanence, and additionality. A company pledging to offset 100,000 tons faces a bill of anywhere from $100,000 for the cheapest avoidance credits to $50 million or more for direct air capture. That price signal is how carbon markets are supposed to work: pollution gets expensive enough that investing in actual emission reductions becomes the better deal.
Who Regulates Carbon Markets in the U.S.
No single agency regulates the entire carbon market in the United States. The Commodity Futures Trading Commission oversees carbon-related derivatives under the Commodity Exchange Act, giving it jurisdiction over futures and options tied to carbon allowances and credits.9Commodity Futures Trading Commission. Commodity Exchange Act and Regulations In 2023 the CFTC formed an Environmental Fraud Task Force to investigate misconduct in carbon markets, including wash trading, fraudulent claims about credit quality, “ghost” credits that represent no real emissions reductions, and manipulation of tokenized carbon trading platforms.10Commodity Futures Trading Commission. CFTC Whistleblower Office Issues Alert Seeking Tips Relating to Carbon Markets Misconduct
The Environmental Protection Agency runs the Greenhouse Gas Reporting Program at 40 CFR Part 98, which requires large emitters to report their greenhouse gas data annually.11US EPA. Learn About the Greenhouse Gas Reporting Program That data feeds compliance program administration and gives the market a factual baseline. The EPA program itself does not create a trading mechanism; it supplies the emissions accounting trading systems depend on.
Public-company disclosure has been a moving target. The SEC adopted climate-related disclosure rules in March 2024 that would have required companies to report their greenhouse gas emissions and use of offsets. Courts stayed the rules in April 2024, the SEC voted to stop defending them in March 2025, and by May 2026 the agency had proposed rescinding them entirely, stating they exceed its statutory authority.12U.S. Securities and Exchange Commission. SEC Proposes Rescission of Climate-Related Disclosure Rules Corporate disclosure of carbon credit use remains largely voluntary for U.S. public companies at the federal level.
International Rules and the EU Border Charge
Article 6 of the Paris Agreement sets the international rules for carbon trading between countries. Under Article 6.2, when one country transfers mitigation outcomes to another, both sides apply “corresponding adjustments” to their national emissions accounting. The selling country adds the transferred tons back to its balance; the buying country subtracts them. Double-entry bookkeeping prevents the same ton from being counted twice.13United Nations Climate Change. Article 6 of the Paris Agreement Article 6.4 creates a new crediting mechanism under the UN that can issue tradable carbon credits with centralized oversight.14UN Climate Change. Paris Agreement Crediting Mechanism
The EU’s Carbon Border Adjustment Mechanism entered its definitive phase on January 1, 2026. Importers bringing cement, iron and steel, aluminum, fertilizers, electricity, or hydrogen into the EU must buy CBAM certificates based on the embedded carbon emissions in those goods. Certificate prices track the EU ETS allowance auction price, and if the exporting country already charges a carbon price on production, the importer can deduct that amount.15European Commission Taxation and Customs Union. Carbon Border Adjustment Mechanism Manufacturers outside the EU now face financial pressure to decarbonize even if their home countries have no cap-and-trade system, because customers pay a carbon cost at the EU border.
Greenwashing Risk for Buyers
The biggest reputational and legal risk in carbon markets today is greenwashing: claiming environmental benefits that don’t hold up. A company advertising itself as “carbon neutral” based on low-quality offsets that lack additionality or permanence faces potential liability from regulators, shareholders, and consumers. The Federal Trade Commission’s Green Guides address substantiation of carbon offset claims, though the most recent version dates to 2012, and the agency has been reviewing potential updates since late 2022 without finalizing new rules.
Courts and regulators in multiple jurisdictions have started treating carbon credit claims more like financial representations than marketing puffery. The voluntary market’s lack of centralized regulation means buyers have to do their own due diligence. A $1 credit from a generic renewable energy project provides far less confidence than a $15 forestry removal credit verified under the Core Carbon Principles. The cheapest credits tend to be the ones most vulnerable to challenge, because the projects behind them are often the hardest to prove were genuinely additional.
A Note on Section 45Q
The U.S. tax credit for carbon capture, Section 45Q, is sometimes confused with carbon market credits, but the two are different instruments. Section 45Q awards a federal tax credit for each metric ton of carbon oxide captured and permanently stored. For equipment placed in service after 2022, the base credit for taxable years beginning in 2025 or 2026 is $17 per metric ton for standard point-source capture and $36 per metric ton for direct air capture. Facilities that meet prevailing wage and registered apprenticeship requirements qualify for enhanced rates of $85 and $180 per ton, respectively. Starting in 2027, these amounts adjust annually for inflation.16Office of the Law Revision Counsel. 26 USC 45Q – Credit for Carbon Oxide Sequestration
A company earning the 45Q credit is not generating tradable carbon credits; it is receiving a direct reduction in its federal tax liability. The credit influences the economics of capture projects that may also generate offsets or allowances under separate programs, but the tax credit itself is not something you can buy or sell on a carbon exchange.