ForecastingStocks

Carbon markets put a price on greenhouse-gas emissions, turning the right to emit (or the act of removing) carbon into something that can be bought and sold. There are two quite different kinds, and conflating them causes confusion.

Compliance markets (cap-and-trade)

In a compliance or cap-and-trade system, a government sets a cap on total emissions and issues a limited number of allowances. Companies must hold one allowance per tonne emitted; those who pollute less can sell their spare allowances to those who pollute more. The cap falls over time, raising the price and pressuring emissions down. The EU Emissions Trading System is the largest example.

Voluntary carbon markets (offsets / credits)

In the voluntary market, anyone can buy a carbon credit — funding a project that supposedly avoids or removes a tonne of CO2 (reforestation, renewable energy, capturing methane) to "offset" their own emissions. This is where Brazil features heavily, given the carbon-storage potential of its forests.

The serious criticisms

Voluntary offsets are controversial, and an investor should know why:

Additionality — would the project have happened anyway? If so, the credit funds nothing extra.
Permanence — a forest planted today can burn down or be cleared tomorrow, releasing the carbon.
Measurement — quantifying "avoided" emissions involves assumptions that are easy to inflate.
Moral hazard — cheap offsets can let companies claim progress while delaying real emission cuts.

Carbon credits are a genuine tool, but they are not interchangeable with actually reducing emissions, and the market has suffered repeated scandals over low-quality credits.