Carbon markets

Well-designed carbon markets can accelerate global climate action by mobilising finance, driving innovation, and enabling international cooperation. By directing investment towards emission reduction and removal activities, they can help countries and companies achieve more ambitious climate goals. High integrity – through robust rules, transparent governance, and credible accounting – is essential to ensure real and lasting climate benefits in line with the Paris Agreement.

What are carbon markets and why are they relevant?

Carbon markets create economic incentives to reduce greenhouse gas emissions by assigning a price to emissions or emission reductions. They can support the implementation of climate policies and the achievement of national climate targets.

Carbon markets are trading systems in which market participants buy and sell allowances or carbon credits. Broadly, they can be divided into allowance markets and carbon credit markets.

A carbon credit is a tradable asset representing one metric tonne of carbon dioxide equivalent that has been avoided, reduced, or removed through a monitored and verified mitigation activity. 

Carbon markets generally operate through two main types of carbon pricing instruments: emissions trading schemes (ETSs) and carbon crediting mechanisms.

Emissions trading schemes

Emissions trading schemes put a price on GHG emissions by requiring regulated entities to surrender allowances for their emissions. The most common type is a cap-and-trade system, in which a regulatory authority sets an overall emissions cap and issues a corresponding number of tradable allowances. The cap typically declines over time, ensuring that emissions are reduced in line with climate targets. Some ETSs allow regulated entities to use a limited number of carbon credits to meet part of their compliance obligations.

Carbon crediting mechanisms

Carbon crediting mechanisms, also known as baseline-and-credit schemes, generate tradable carbon credits from activities that avoid, reduce, or remove GHG emissions relative to a defined baseline. Unlike emissions trading schemes, carbon crediting mechanisms do not require entities to pay for their emissions. Instead, project developers generate carbon credits by demonstrating verified emission reductions or removals beyond a credible counterfactual baseline. Because credits only have value if there is demand, these mechanisms depend on buyers, such as regulated entities seeking compliance options or governments and companies pursuing voluntary climate commitments.

Compliance and voluntary carbon markets

Carbon market instruments can operate at the international, regional, national, or subnational level. They are generally grouped into two categories:

• Compliance carbon markets, where demand is created through legally binding climate policies or emission reduction targets. These include ETSs, the use of carbon credits under Article 6 of the Paris Agreement, and mechanisms such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
• Voluntary carbon markets, where governments, companies, organisations, and individuals voluntarily purchase and retire carbon credits to support climate mitigation beyond regulatory requirements.

Why work with GIZ on carbon markets?

GIZ combines long-standing government partnerships, broad implementation experience and a strong commitment to high-integrity carbon markets under Article 6 of the Paris Agreement and in the voluntary carbon market.

Our Approach to Carbon Markets

GIZ’s engagement is structured around three mutually reinforcing pillars: 

• Framework readiness support provides the enabling structure; 
• Capacity building equips partners to apply that structure effectively; and 
• Project and pipeline development translates frameworks and capacities into concrete, high-integrity carbon market activities.

Based on this profile, GIZ provides a broad range of services for governments and private sector partners. Working with partner governments and local organisations, we support the development of market frameworks, capacity development, and strategic policy advice. Through GIZ International Services, we partner with companies, foundations and national governments to design and implement high-integrity carbon market projects. 

For further information please look at our service offer.

Get to know our GIZ carbon market flagship projects