Quick Comparison
| Voluntary Carbon Market (VCM) | Compliance Carbon Market | |
|---|---|---|
| Scope | Project-based emission reductions/removals traded voluntarily | Government-mandated cap on emissions with tradeable allowances |
| Applicability | Any organization seeking to offset emissions | Regulated entities (power plants, heavy industry, airlines) |
| Required/Voluntary | Entirely voluntary | Legally required for covered entities |
| Geography | Global, no jurisdictional boundaries | Jurisdiction-specific (EU ETS, California, China, etc.) |
| Key Focus | Climate ambition beyond legal requirements | Emission reduction through regulatory caps |
What is the Voluntary Carbon Market?
The voluntary carbon market enables organizations and individuals to purchase carbon credits generated by projects that reduce or remove greenhouse gas emissions. Participation is driven by corporate climate commitments, ESG strategies, or stakeholder expectations—not legal obligation. Projects span renewable energy installations, forest conservation (REDD+), methane capture, improved cookstoves, and emerging technologies like direct air capture.
Credits in the VCM are issued by independent standards bodies: Verra's Verified Carbon Standard (VCS), Gold Standard, the American Carbon Registry (ACR), and Climate Action Reserve (CAR). Each standard defines methodologies, requires third-party verification, and maintains registries to track issuance, transfer, and retirement. The market reached approximately $2 billion in value in 2023, down from a peak of $2.1 billion in 2022, as quality concerns and greenwashing scrutiny slowed demand.
The VCM is undergoing structural reform. The Integrity Council for the Voluntary Carbon Market (ICVCM) introduced Core Carbon Principles (CCPs) in 2023 to establish a quality benchmark. The Voluntary Carbon Markets Integrity Initiative (VCMI) published a Claims Code of Practice governing how buyers can credibly use credits in corporate claims. These initiatives aim to rebuild trust after high-profile investigations questioned the additionality and permanence of widely traded credit types.
What is the Compliance Carbon Market?
Compliance carbon markets are regulatory systems where governments set a cap on total emissions for covered sectors and issue tradeable allowances representing the right to emit one tonne of CO₂e. The largest is the EU Emissions Trading System (EU ETS), covering approximately 40% of EU greenhouse gas emissions across power generation, heavy industry, and intra-European aviation. Other major systems include California's cap-and-trade program, the Regional Greenhouse Gas Initiative (RGGI) in the northeastern United States, China's national ETS, and South Korea's ETS.
Under cap-and-trade, regulated entities must surrender allowances equal to their annual verified emissions. Entities that reduce emissions below their allocation can sell surplus allowances; those exceeding their allocation must purchase additional ones. The cap declines over time, creating increasing scarcity and rising carbon prices that incentivize decarbonization investment. EU ETS allowance prices exceeded €100/tonne in early 2023 before settling in the €60-80 range through 2024-2025.
Compliance markets are backed by legal enforcement. Entities that fail to surrender sufficient allowances face penalties—in the EU ETS, €100 per tonne plus the obligation to deliver the missing allowances. This enforcement mechanism creates a hard floor on compliance and a genuine financial incentive for emission reduction that voluntary commitments cannot replicate.
Key Differences
1. Legal obligation. Compliance markets exist because law requires them. Covered entities must participate or face penalties. The VCM operates on voluntary choice—no consequence for non-participation beyond missed opportunities for climate credibility.
2. Market size and liquidity. Compliance markets dwarfed the VCM in 2023: the EU ETS alone traded over €750 billion in value, while the entire voluntary market was approximately $2 billion. This difference in liquidity means compliance markets have more robust price discovery, more sophisticated financial products, and more institutional participation.
3. Price levels. Compliance credits trade at higher prices because demand is legally mandated. EU allowances ranged €60-100/tonne in 2023-2025. Voluntary credits ranged from under $1 for older renewable energy credits to $100+ for high-quality removals, with nature-based avoidance credits averaging $5-15/tonne.
4. Credit fungibility. Within a compliance system, allowances are fully fungible—one EU allowance equals any other. Voluntary credits are heterogeneous: a REDD+ credit from Peru, a cookstove credit from India, and a biochar credit from the US carry different risk profiles, co-benefits, and market perceptions.
5. Oversight structure. Compliance markets are governed by sovereign regulators with enforcement powers. The VCM is governed by non-governmental standards bodies with no legal enforcement authority. Registry infractions in the VCM result in deregistration; compliance violations result in financial penalties and potential legal action.
6. Additionality test. Voluntary credits must demonstrate additionality—that the emission reduction would not have occurred without carbon finance. Compliance allowances don't face an additionality test; they exist because the regulator created them. The additionality requirement is a strength of the VCM concept but also its greatest source of controversy.
7. Climate ambition signaling. Participating in compliance markets signals legal compliance. Participating in the VCM signals climate ambition beyond legal requirements. For companies in unregulated sectors, voluntary credit purchases are one of the few ways to demonstrate financial commitment to emission reduction.
Which One Do You Need?
If your operations fall under a compliance market, you have no choice—purchase or earn enough allowances to cover your emissions. The strategic question is whether to invest in abatement (reducing emissions to reduce allowance needs) or purchase allowances. At current EU ETS prices, many abatement options are cost-competitive with allowance purchases.
If you're not in a regulated sector, the VCM provides a mechanism to take financial responsibility for your emissions. The quality of what you buy matters enormously. Prioritize credits that meet the ICVCM Core Carbon Principles, and align your purchasing with the VCMI Claims Code to ensure credible communication.
Companies anticipating future regulation should consider voluntary purchases as preparation. Understanding carbon markets, building internal carbon pricing capabilities, and developing procurement expertise positions you well for the transition to mandatory participation.
Can You Use Both?
Many large companies operate in both markets simultaneously. A European utility surrenders EU ETS allowances for its power generation emissions while purchasing voluntary credits to address Scope 3 emissions not covered by the compliance system. A multinational manufacturer might face compliance obligations in the EU and California while using voluntary credits for operations in unregulated jurisdictions.
The critical constraint is no double counting. A tonne of reduction cannot simultaneously back a compliance credit and a voluntary credit. Article 6 of the Paris Agreement addresses this at the national level through "corresponding adjustments." At the corporate level, clear documentation of which emissions are covered by which instrument prevents accounting overlap.
Some compliance systems allow limited use of offset credits for compliance. California's cap-and-trade program permits covered entities to use qualifying offset credits (from ARB-approved projects) for up to a percentage of their compliance obligation. The EU ETS phased out international offset credits after 2020.
Council Fire's Perspective
Both markets have a role in the transition to a low-carbon economy, but they serve fundamentally different functions. Compliance markets create the regulatory floor—the minimum price of carbon that makes decarbonization economically rational. Voluntary markets channel additional capital to projects and technologies that regulation hasn't yet reached. We help clients navigate both with clarity about what each market can and cannot deliver.
The VCM's credibility crisis is real but solvable. The combination of ICVCM quality benchmarks, VCMI claims guidance, and Article 6 governance is building the infrastructure for a trustworthy voluntary market. Companies that engage now—with rigorous due diligence—position themselves at the leading edge of a market that will grow substantially as corporate climate commitments intensify.
Frequently Asked Questions
Will voluntary markets become compliance markets?
Some voluntary commitments are evolving into regulatory requirements. The EU CSRD mandates climate transition plans. California's SB 253 requires large companies to disclose emissions. As regulation expands, companies that invested in voluntary carbon management will have an advantage, though the specific credits may not transfer between market types.
Can voluntary carbon credits be used for compliance purposes?
Only if the compliance system explicitly allows it. California permits approved offset credits for a limited portion of compliance obligations. The EU ETS does not accept voluntary market credits. Each jurisdiction sets its own rules.
Why are compliance credit prices so much higher than voluntary credit prices?
Demand for compliance credits is legally mandated and supply is capped by regulation, creating genuine scarcity. Voluntary demand is discretionary and can vanish during economic downturns or reputational crises. This structural difference in demand certainty drives the price gap.
What is Article 6 of the Paris Agreement and how does it affect these markets?
Article 6 establishes rules for international carbon market cooperation. Article 6.2 governs bilateral transfers of emission reductions between countries. Article 6.4 creates a new centralized crediting mechanism supervised by the UN. These rules affect how credits cross borders and whether they can be counted toward national climate targets, influencing both compliance and voluntary markets.
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