The carbon market is growing fast, but it’s also a bit of a maze for those new to the space. One of the biggest distinctions to understand is the difference between compliance carbon markets and voluntary carbon markets. While they both revolve around carbon units, they function in different ways, serve different players, and ultimately shape how industries and businesses engage with carbon reduction.
If you’ve ever wondered how carbon trading actually works—or why some companies have to buy carbon units while others do it by choice—this is your guide.
A compliance carbon market is government-regulated, meaning companies are legally required to participate. These markets are usually part of cap-and-trade systems or carbon taxes, where emissions limits (caps) are set, and businesses must either reduce emissions or purchase allowances (carbon units) to cover what they emit.
The European Union Emissions Trading System (EU ETS) is one of the largest compliance markets in the world. It sets a cap on emissions from industries like steel, cement, and aviation, gradually reducing this cap over time to push businesses toward greener solutions. If a company emits more than its allowed limit, it must purchase additional allowances from others who have reduced their emissions.
Other compliance markets include California’s Cap-and-Trade Program, China’s national carbon market, and the UK Emissions Trading Scheme.
The voluntary carbon market (VCM) operates outside government mandates. Here, companies, organisations, and even individuals choose to offset their emissions by purchasing carbon units from projects that reduce or remove carbon from the atmosphere.
Big brands like Microsoft, Google, and Nestlé use the voluntary carbon market to achieve net zero or reduce their carbon footprint. For example, Microsoft buys carbon units from forest conservation projects to balance out emissions from its operations.
Unlike compliance markets, which involve fixed rules and regulatory oversight, the voluntary market is more dynamic and flexible. Buyers select projects that align with their sustainability goals, and units are issued based on verified carbon reductions.
While both compliance and voluntary carbon markets revolve around carbon units, they function differently. Compliance markets are strictly regulated, requiring companies in high-emission industries—like energy, aviation, and manufacturing—to follow government-set emissions limits. These companies must either reduce their emissions or buy allowances to cover excess pollution.
Voluntary markets, on the other hand, are open to any business, organisation, or individual looking to compensate for their carbon footprint. They operate without legal mandates, allowing participants to support projects like reforestation, renewable energy, or carbon capture.
Another key difference is how units are issued. Compliance markets deal with emission allowances, often traded within a cap-and-trade system, while voluntary markets generate offsets from verified climate projects. Compliance units exist within rigid frameworks, whereas voluntary units are more flexible, giving buyers the freedom to choose projects that align with their sustainability goals.
Both systems play essential roles—compliance markets enforce carbon reduction through regulation, while voluntary markets encourage companies to go beyond legal requirements and invest in environmental solutions.
The distinction between compliance and voluntary carbon markets isn’t just a technicality—it shapes how businesses and entire industries approach carbon reduction. Compliance markets force high-emission sectors to play by the rules, pushing them toward lower emissions through financial penalties and tightening regulations. These systems aren’t optional; they’re structured to make pollution expensive and force companies to adapt.
Voluntary markets, meanwhile, operate on a different logic. Here, companies take action because they want to, whether to meet sustainability goals, boost their reputation, or appeal to climate-conscious investors. This flexibility fuels innovation, funding reforestation projects, carbon capture technologies, and renewable energy developments that might not happen otherwise.
But these two markets aren’t separate worlds. Some governments are exploring ways to integrate voluntary offsets into compliance schemes, while companies in regulated markets often turn to voluntary units to go beyond the bare minimum legal requirements. The reality is, that neither system alone will solve the carbon challenge, but together, they shape a financial ecosystem that rewards lower emissions—whether through regulation, market demand, or a mix of both.
If you’re navigating the carbon market, understanding these two systems is crucial. Compliance markets set the legal framework for emissions reduction, while voluntary markets offer a way for businesses to take proactive climate action.
Both markets are growing, and their influence will only increase as industries, investors, and consumers demand more accountability for emissions. Whether you’re an investor, a business, or just someone interested in sustainability, knowing how these markets work gives you a better grasp of the forces shaping the future of carbon trading.