Understand the Working of Carbon Market Under the Paris Agreement

October 5, 2020 By Kishore Gaikwad

Climate change and environmental concerns have been quite talked about these days. There are multiple agencies, forums, and platforms that are working on it already. One such crucial meet-up is the COP- Conference of Parties, which is held annually at different locations. During one such meet, there came to be a landmark agreement known as the Paris Agreement. The carbon market is a part of this important agreement. Let us explore the same.

A brief about the Paris Agreement:

At one of the conference of parties held at Paris in the year 2015, countries came together to fight unanimously against the climate problem. This agreement aims to keep the global temperature rise below 2 degrees Celsius above pre-industrial levels. Not just this, but it contains a lot many crucial environmental concerns that need to be done away with. The carbon market mechanism is just a refreshing new way to tackle the old and pressing problem of global warming.   

Understanding the working of carbon market:

The world’s major environmental concern is the uncontrolled emission of carbon or greenhouse gas emissions. In lieu of the same and coming with a better idea to combat the same, the system of the carbon market is established. Here ‘carbon emissions’ is the commodity that is being traded. A regulatory mechanism ensures that countries are made responsible for every amount of emissions they generate.

There are two types of carbon markets that are into operation- emissions trading system and a new voluntary scheme. While for the former, countries have agreed, it is the latter for which few countries have come up to mitigate the climate problem in a pro-active manner.

Talking about the emissions trading system, it sets an upper limit to the amount of carbon emission country is allowed. All of this is already determined and covered under the upper limit. So, after a certain pre-determined period, the emitters have to surrender the allowances equal to the greenhouse gas emissions they have produced in that duration. Here the allowances mean the amount of emissions permits that are allotted to that particular country. This allocation gives the emitters a certain amount of rights to produce a metric tonne of carbon dioxide equivalent.     

A whole lot of maths goes into the trading system, keeping track of the permits, legalities involved, etc. There are pros and cons of this kind of mechanism but nevertheless, this system is working in favour of reducing the carbon emissions.


To work on a system involving rich and poor countries alike is itself a mammoth task to deal with. Yet the start of this kind of regulatory and mitigation mechanism is touted to work in favour of tackling the global climate change issue. With more countries coming to follow the second kind of carbon market mechanism, it paints a positive picture in the mitigation of environmental concerns. However, there is still a lot to be done for countries to come up with sustainable solutions for a greener planet.

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