Two Paths, One Goal: Understanding Carbon Markets in Cambodia - Part 1

In the global race to mitigate climate change, carbon markets have emerged as a pivotal, if complex, economic tool. They create a framework for buying and selling credits that represent measurable reductions or removals of greenhouse gas (GHG) emissions. These markets are broadly split into two distinct streams: Voluntary Carbon Markets (VCMs), driven by corporate sustainability goals and private initiatives, and Compliance Carbon Markets (CCMs), which are legally mandated by governments to enforce emission reduction targets on major polluters.

Given the depth and evolving nature of this topic, we will be exploring it through a comprehensive multi-part series. This first installment lays the foundation by introducing the core principles of both VCMs and CCMs. In subsequent parts, we will guide you through the entire carbon credit lifecycle, from its generation to its retirement; contextualize the markets within the global landscape and its history; and finally, zoom in on Cambodia’s unique position and engagement with both voluntary and international compliance mechanisms under Article 6 of the Paris Agreement.

This deep dive comes at a critical time. Carbon markets globally are undergoing rapid evolution and facing heightened scrutiny. Growing skepticism, particularly toward voluntary markets over concerns about credit quality and environmental integrity, has spurred action from regulators and international bodies like the Integrity Council for the Voluntary Carbon Market (ICVCM). These efforts aim to fortify the entire system with greater transparency and standardization. As a result, the market is shifting toward a future where the credibility and verifiable impact of every carbon credit take center stage, making a clear understanding more crucial than ever.

Introduction to Carbon Markets#

As global economies pivot towards sustainability and decarbonization, carbon markets have emerged as a critical financial tool to address climate change. This part provides a foundational overview of these complex systems. We will define what carbon markets are, their fundamental purpose in placing a price on emissions, and how they function. We will then dissect the two primary categories: the corporate-driven VCMs and the government-mandated CCMs, examining the unique drivers, rules, and actors that define each. By understanding their core mechanics and the key distinctions between them, we can better appreciate their role in the global effort to achieve Net-Zero.

Definition and Purpose of Carbon Markets#

Carbon markets constitute an economic framework designed to support the buying and selling of environmental commodities known as carbon “credits” or “offsets”.¹ These instruments represent a quantifiable reduction, avoidance, or sequestration of GHG emissions, including carbon dioxide (CO2), methane, and nitrous oxide.¹ Governments and private entities typically establish these markets with the overarching objective of supporting climate change mitigation. Beyond direct emission reductions, carbon markets can also serve broader environmental goals, such as the conservation of forests, soils, or biodiversity. Fundamentally, carbon credits possess monetary value, are tradeable, and are recognized as commodities in significant economic and legal contexts.¹

Voluntary Carbon Markets (VCMs): Operational Principles, Regulatory Frameworks, Main Actors#

VCMs function as platforms for the consensual buying and selling of carbon credits, operating distinctly outside any governmental regulatory mandate.¹

A. Operational Principles#

Participation in VCMs is driven by voluntary motivations. Companies, organizations, and individuals engage in these markets to offset their unavoidable emissions, fulfill corporate sustainability commitments, enhance their public image by claiming “carbon neutrality,” or to gain practical experience in carbon trading in anticipation of future compliance obligations. Credits within VCMs are generated from specific, project-based activities, such as forest protection or renewable energy initiatives. These projects are certified by independent standards, with each credit typically representing one tonne of verified CO2 equivalent (CO2e) reduced or removed from the atmosphere. A key characteristic differentiating VCMs from compliance markets is the absence of a fixed cap on supply; new credits are continuously issued as projects successfully demonstrate additional climate action.

B. Regulatory Frameworks#

VCMs have historically operated with minimal direct governmental oversight, instead relying on private standards and registries.¹ This decentralized setup has contributed to significant variability in the credibility and quality of GHG reduction claims, largely due to the absence of a central authority or universally accepted standards for credit issuance.¹ However, this is beginning to change. Recent moves by public institutions — such as the Commodity Futures Trading Commission’s (CFTC) proposed guidance on voluntary carbon credit (VCC) derivatives² and the Biden Administration’s release of voluntary principles³ — reflect growing momentum toward strengthening market integrity. While these initiatives stop short of regulating the spot market — where the actual credits are bought and sold — they seek to elevate the quality and trustworthiness of the credits that underpin market activity.

C. Main Actors#

The VCM brings together a wide range of participants. At the core are project developers — often NGOs or private companies — who design and manage projects that reduce or remove greenhouse gas emissions.¹ Independent certifiers ensure these projects meet recognized standards. Exchanges and brokers help match buyers and sellers, making credit trading possible. Carbon credit registries play a central role by issuing credits, tracking ownership, setting certification rules, accrediting third-party verifiers, and approving specific project methodologies.¹ On the demand side are the buyers, including companies with net-zero goals, philanthropic organizations, and even individuals, all seeking to offset their carbon footprints.¹

The nature of carbon credits as tradeable commodities with monetary value means that their spot markets have largely operated without centralized, overarching regulation.¹ This lack of direct oversight has contributed to the “wide variance in quality” and growing skepticism from investors and the media.¹ In the absence of a unified authority to set and enforce standards for the underlying asset itself, issues such as non-additionality (credits for projects that would have happened anyway), non-permanence (reversal of carbon storage), and even fraud can arise.

While some financial regulators have introduced guidance for carbon credit derivatives, these efforts tend to influence the spot market only indirectly — by setting rules for derivative trading platforms rather than directly regulating the quality of the underlying credits. This highlights the broader jurisdictional and structural challenges of overseeing a globally distributed, voluntary market. For VCMs to achieve their full potential as credible climate mitigation tools, there may be a growing need for a more robust and harmonized regulatory framework for the spot market — or for stronger, enforceable standards through derivatives markets and private governance mechanisms.

Compliance Carbon Markets (CCMs): Operational Principles, Regulatory Frameworks, Main Actors#

CCMs, also known as mandatory markets, are established and regulated by national, regional, or international carbon reduction regimes. These markets are a cornerstone in the effort to reduce atmospheric GHG, primarily targeting energy-intensive emitters like iron and steel producers, oil refineries, power generators, airlines, and processing companies.⁴ Unlike VCMs, which operate outside direct government oversight, CCMs use tradeable emission units to meet binding commitments.⁵ The core aim is to put a price on pollution, thereby incentivizing emissions reductions.⁴

A. Operational Principles#

CCMs primarily function through two main mechanisms: carbon taxes or cap-and-trade schemes.⁴

• Carbon Tax: This approach sets a direct price on carbon emissions, making pollution more expensive and encouraging entities to reduce their emissions.⁴

• Cap-and-Trade Schemes: These systems set a limit (a “cap”) on the total amount of specific greenhouse gases that can be emitted by covered installations.⁴ This cap is progressively reduced over time to ensure a decline in total emissions.⁴ Within this cap, companies receive or buy emission allowances, which they can trade.⁵ Entities that reduce their emissions below their allocated allowances can sell their surplus to others who exceed their limits (a “trade”). Conversely, entities must surrender enough allowances to cover their emissions annually or face penalties.⁴

B. Regulatory Frameworks#

CCMs are underpinned by mandatory national, regional, or international carbon reduction regimes.⁴ Many countries have implemented such mechanisms to meet their Nationally Determined Contributions (NDCs) as stipulated under the Paris Agreement.⁴ The Paris Agreement’s Article 6, for instance, establishes rules for international carbon trading to help countries achieve their NDCs. This includes frameworks for bilateral cooperation (Article 6.2) and a centralized international carbon crediting mechanism (Article 6.4 or PACM).⁵ These frameworks involve complex rules, such as “corresponding adjustments,” to prevent the double counting of emission reductions when mitigation outcomes are transferred internationally.⁵

International treaties can also establish CCMs to enforce sectoral obligations, such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA), which requires airlines to offset emissions exceeding a defined baseline for international flights.⁵

C. Main Actors#

Several actors play crucial roles in the functioning of CCMs:

• Governments and Regulatory Bodies: These entities establish the CCMs, set the rules, define emission caps, allocate or auction allowances, and enforce compliance.⁵ They also negotiate and implement international agreements like Article 6.

• Regulated Entities: These are typically companies in energy-intensive sectors (e.g., power generation, manufacturing, aviation) that are subject to the emission reduction obligations set by the CCM.⁴ They must monitor their emissions, surrender allowances, and can participate in trading.⁵

• International Bodies and Crediting Mechanisms: Organizations like the UNFCCC (overseeing Article 6 mechanisms like PACM) and ICAO (for CORSIA ) play a significant role in setting international rules and standards.⁵ Governmental, international, and independent crediting mechanisms are responsible for registering mitigation activities and issuing carbon credits.⁵

• Verification and Auditing Bodies: Independent third-party auditors are crucial for verifying emission reductions and ensuring the integrity of carbon credits.⁵

CCMs are indispensable tools in the global strategy to achieve Net-Zero emissions. By imposing a cost on pollution and creating a market for emission reductions, CCMs drive mitigation action in key sectors. Their regulatory frameworks, often linked to international agreements like the Paris Agreement, provide the structure for this action. While distinct from VCMs, CCMs have multiple points of interaction, creating a complex but evolving landscape. Ensuring the environmental integrity of all carbon market segments is critical to their success and their ability to genuinely contribute to a sustainable, low-carbon future. Governments play a crucial role in establishing robust CCMs and can also influence VCMs to ensure both markets operate with high integrity and effectively support our collective climate ambitions.

VCMs and CCMs: Distinct but Interacting#

While distinct in their regulatory nature, CCMs and VCMs are not entirely separate and can influence each other ("interplay").⁵

• Differences: CCMs involve mandatory obligations and are government-regulated, whereas VCMs involve voluntary use of carbon credits by businesses, governments, and individuals seeking to be accountable for their carbon footprint, typically without direct government oversight.

• Credit Supply: Some carbon crediting mechanisms may supply credits to both VCMs and CCMs. For example, CORSIA, a compliance market, has granted eligibility to credits from various international, independent, and governmental crediting mechanisms that also serve VCMs.⁵ Similarly, some domestic compliance instruments (e.g., carbon taxes in Chile, Colombia, South Africa, Singapore) recognize carbon credits from independent standards that primarily serve VCMs, often with additional governmental quality controls.⁵

• Influence on Standards: Frameworks developed in one market can influence the other. CORSIA’s environmental integrity framework, for example, has influenced norms in VCMs.⁵ Conversely, approaches developed in VCMs, such as methodologies from independent standards like Verra or Gold Standard, are sometimes leveraged by buyer countries in Article 6.2 agreements.⁵

• Price and Demand Dynamics: Developments in one market can affect the other. A significant decline in demand from a large CCM, for example, could impact prices and demand across other carbon credit markets.⁵

• Article 6 and VCMs: The rules of Article 6, a compliance framework, can indirectly influence environmental integrity in VCMs, particularly regarding “corresponding adjustments” to avoid double claiming when credits are used for voluntary purposes.⁵ Some seller countries are developing frameworks that define how carbon credits can be used for voluntary or compliance purposes, depending on their link to the country’s NDC.⁵

TLDR: Voluntary vs. Compliance Carbon Markets#

A. Primary Driver#

• Voluntary actions by corporations, NGOs, and individuals for Corporate Social Responsibility (CSR), sustainability goals, and carbon neutrality claims.

• Legally binding mandates from national, regional, or international authorities to meet emission reduction targets.

B. Regulatory Framework#

• Historically self-regulated, relying on private, independent standards and registries (e.g., Verra, Gold Standard). Now facing increasing scrutiny and guidance from bodies like the CFTC and ICVCM to improve integrity.

• Established and enforced by government legislation (e.g., national laws, regional agreements like the EU ETS, international treaties like the Paris Agreement’s Article 6).

C. Operational Principle#

• Project-based credit generation (e.g., forestry, renewable energy). No overall emissions cap; supply grows as new projects are verified.

• Primarily operates through cap-and-trade schemes, which set a firm limit on total emissions that declines over time, or through carbon taxes that set a direct price on emissions.

D. Key Actors#

• Project Developers (NGOs, private firms), Independent Certifiers, Brokers and Exchanges, Carbon Credit Registries, Buyers (Corporations, individuals)

• Governments & Regulatory Bodies (set rules and caps), Regulated Entities (e.g., power plants, airlines), International Bodies (e.g., UNFCCC, ICAO), Verification Bodies.

E. Nature of Credits#

• Credits (often called “offsets”) represent a verified reduction or removal of one tonne of CO2e. Quality and credibility can vary significantly between different standards and projects.

• Credits (often called “allowances”) grant the holder the right to emit one tonne of CO2e. Used to meet mandatory compliance obligations.

F. Market Dynamics#

• Characterized by a “wide variance in quality” and concerns over integrity issues like additionality and permanence. Prices are influenced by supply from diverse projects and demand from voluntary buyers.

• Prices are driven by the scarcity created by the emissions cap and the compliance needs of regulated entities. Prices and demand in one CCM can impact other markets.

G. Interplay with the Other Market#

• Methodologies developed in VCMs are sometimes adopted for compliance purposes (e.g., under Article 6.2). Faces influence from compliance frameworks like CORSIA on integrity standards.

• Can accept credits from VCM standards to meet compliance (e.g., carbon taxes in Colombia, South Africa). The rules of compliance frameworks like Article 6 can indirectly shape VCM integrity, especially regarding double counting.

While VCMs and CCMs operate under different principles and structures, their boundaries are increasingly porous. Through shared methodologies, overlapping crediting mechanisms, and evolving policy linkages — such as Article 6 — VCMs and CCMs are shaping each other’s standards, supply dynamics, and credibility.

… to be continued …

Understanding the distinction between voluntary and compliance markets is the first step. But to truly grasp their value and integrity, we must look closer at the product they trade: the carbon credit.

Join us next time for Part 2 of this series, as we unpack the intricate process of the Carbon Credit Lifecycle. We’ll explore how a climate project on the ground becomes a verified, registered, and tradeable asset. Don’t miss it!

Disclaimer: The information provided is for general informational purposes only and does not constitute legal advice. It is essential to seek the advice of a competent legal professional for your specific circumstances. Relying on this information without professional legal guidance is at your own risk.

Works cited#