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  • Pedro Barros

Regulated Carbon Market vs. Voluntary Market: Understanding the Crucial Differences

The carbon credit market represents an essential tool to incentivize companies to adopt more sustainable practices and drive the transition to a low-carbon economy. By entering this market, companies showcase their commitment to sustainability, attract environmentally conscious investors, and contribute to the fight against global climate change.

There are two main types of carbon markets: regulated and voluntary. The regulated market is a governmental or international initiative that imposes obligations on participants to acquire carbon credits, aiming at the compulsory reduction of emissions. In Brazil, an example of a regulated market is the biofuels market (RenovaBio). This program sets annual decarbonization targets for the fuels sector, aiming to stimulate the expansion of biofuels production in the national transportation energy matrix.

On the other hand, the voluntary market is an option where participants voluntarily purchase carbon credits to reduce their ecological carbon footprints. Lux Carbon Standard (LuxCS) operates in this market with the Triple C Protocol Standard. Their protocol is a sequential guide that directs carbon credit certification processes and contributes to the global economy's decarbonization. LuxCS utilizes nature-based solutions to mitigate the impacts of the climate emergency.

The main distinction between these markets lies in the requirement: participants in regulated markets are obligated to reduce their emissions in accordance with targets set by the government or regulatory body. Conversely, participants in voluntary markets are not compelled to reduce their emissions, although both play essential roles in the effort to combat greenhouse gas emissions (GHGs). In this regard, LuxCS strongly recommends that organizations and institutions acquiring credits within the Triple C Protocol Standard also reduce their emissions and make other efforts to minimize their impacts.

The regulated market seeks to fulfill established climate objectives, as governmental obligations drive companies to take concrete measures to reduce emissions and acquire carbon credits to meet established limits. On the other hand, the voluntary carbon market expands its role as a valuable tool for companies and individuals seeking to voluntarily reduce their emissions. It offers a range of options, such as investing in native forest restoration projects, reforestation, and agribusiness, allowing organizations to demonstrate their commitment to sustainability.

Another significant difference between the regulated and voluntary markets is the price of carbon credits. Generally, prices in the regulated market are higher, as companies are mandated to meet targets set by the government or regulatory body, and purchasing carbon credits may be necessary to avoid financial penalties. Conversely, in the voluntary market, prices tend to be lower, as participation is not compulsory, and companies are motivated by social responsibility, image enhancement, and cost reduction.

The Brazilian National Congress is currently discussing regulations that signal an appreciation for the voluntary market. In the proposal supported by the National Confederation of Industry (CNI), 20% of credits for emissions compensation in the Brazilian regulated market should come from voluntary market projects. This initiative values an alignment between the two carbon markets to shed light on various actions being implemented by the Brazilian private sector.

Companies participating in carbon markets, whether regulated or voluntary, demonstrate a concrete commitment to sustainability and consequently attract investors concerned with environmental issues. Additionally, they contribute to the global fight against climate change by providing tangible solutions for emissions reduction.

It's important to highlight that beyond financial advantages, the carbon market also brings significant environmental and social benefits. Resources obtained through the sale of carbon credits are often invested in socio-environmental projects, such as reforestation and renewable energy generation initiatives. Such initiatives not only offset emissions but also promote environmental preservation and restoration, enhancing the planet's quality of life.

As the carbon market continues to evolve, its relevance grows even more in the context of the battle against climate change. It not only rewards companies for meeting emissions reduction goals but also stimulates innovation and progress toward a greener, more resilient world. Participation in the voluntary carbon market is a concrete testament that the private sector can and should be a key agent in building a sustainable future for all.

Contributors: Camila Hillesheim Kraus and Pedro Guilherme Kraus

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