Carbon markets and mitigation tools

The first principle

A factory that emits carbon dioxide pays for its fuel but not for the harm the gas does to everyone else, and economists call such an unpaid cost an externality. If emitting carries a price, every firm cuts where cutting is cheaper than paying, so the total cut is reached at the lowest cost, which is the case for carbon pricing. Every other tool in this note, from carbon capture to planting forests to dimming sunlight, is judged by three tests: what it costs per tonne, how long the carbon stays away, and whether it creates real cuts or only moves them on paper.

The core

Pricing carbon

• Carbon tax. The state fixes a price per tonne and lets the market decide how much is cut, so firms know their cost but the total cut is uncertain. Finland introduced the first carbon tax in 1990.
• Cap and trade. The state fixes the total, the cap, and issues permits up to it that firms may trade, so the total is certain but the price moves with demand. The European Union Emissions Trading System, started in 2005, is the longest running major example and the largest by value, and China's national system, started in 2021 for power plants, is the largest by emissions covered.
• Intensity based trading. A third form, used by India's Carbon Credit Trading Scheme (CCTS), sets each unit a target of emissions per tonne of product rather than a fixed total, so output can grow; the note on India's climate action explains it.
• The reach of pricing. The World Bank's State and Trends of Carbon Pricing 2025 found that carbon taxes and trading systems covered about 28 per cent of world emissions and raised over 100 billion dollars for public budgets in 2024.

Carbon credits and their quality

• A carbon credit certifies that one tonne of carbon dioxide equivalent was cut or removed by a project, and it can be sold to a buyer who uses it to offset its own emissions. Compliance markets are created by law; voluntary markets serve companies meeting their own pledges.
• Quality has four tests. A credit is additional only if the cut would not have happened anyway, permanent only if the carbon does not return, free of leakage only if emissions do not simply move elsewhere, and counted once only if no other party claims the same tonne.

Article 6 of the Paris Agreement

• Article 6.2, cooperative approaches. Countries may transfer emission cuts to each other as internationally transferred mitigation outcomes (ITMOs), but the seller must make a corresponding adjustment, adding the tonnes back to its own account, so the same tonne is never counted by both.
• Article 6.4, the Paris Agreement Crediting Mechanism. This is a central, United Nations supervised market that succeeds the Clean Development Mechanism, with a Supervisory Body that approves methodologies; a share of proceeds goes to the Adaptation Fund, and a part of every issuance is cancelled so that trading delivers an overall cut in global emissions rather than only moving it.
• Article 6.8 covers cooperation without markets.
• The rules. The basic rules were agreed at Glasgow in 2021, and the twenty ninth Conference of the Parties (COP29) at Baku in November 2024 completed them, adopting the standards for methodologies and removals under 6.4 and the procedures for authorising, recording and reviewing trades under 6.2.

Capturing and removing carbon

• Carbon capture, utilisation and storage (CCUS) catches carbon dioxide from a chimney, usually by scrubbing flue gas with amine solvents, compresses it and either uses it, in urea, chemicals or concrete, or pumps it into deep saline aquifers, old oil and gas fields or basalt where it turns into rock. Norway's Sleipner project has stored carbon dioxide under the North Sea since 1996. It suits cement, where most emissions come from heating limestone rather than from fuel.
• Carbon dioxide removal takes carbon out of the air already emitted, by forests and soil, biochar, bioenergy with capture and storage, direct air capture and faster weathering of crushed rock. The Sixth Assessment Report of the Intergovernmental Panel on Climate Change (IPCC) found that every pathway to 1.5 °C uses some removal to balance emissions that cannot be cut.

Nature based solutions and geoengineering

• Nature based solutions are actions that protect, manage or restore ecosystems to meet a social challenge while benefiting biodiversity, as defined by the International Union for Conservation of Nature (IUCN), which published a Global Standard for them in 2020. Forests, mangroves, peatlands and grasslands store carbon cheaply and also protect coasts and water, and Reducing Emissions from Deforestation and Forest Degradation (REDD+) pays developing countries for forest carbon kept in place.
• Solar radiation modification would cool the planet by reflecting sunlight, for example by spraying sulphate particles into the stratosphere, as the Pinatubo eruption of 1991 did naturally when it cooled the world by about 0.5 °C for a year or so. It would not remove carbon or stop ocean acidification, it could shift monsoon rainfall, and if it stopped suddenly the masked warming would return within years, the termination shock. The Convention on Biological Diversity asked in 2010 (decision X/33) that no climate related geoengineering affecting biodiversity take place until science and governance were in place.

Dimensions

• Economic. A carbon price raises energy costs, so how revenue is used matters: returning it to households, as some countries do, or funding clean technology makes it fairer and more acceptable.
• Equity. Offsets let rich emitters pay poorer countries to cut on their behalf, which can bring money to the South but can also let the North delay its own cuts and use up the cheapest options in host countries, which is why India restricts what it sells abroad.
• Trade. Border carbon taxes extend one region's carbon price to everyone who sells to it, which developing countries see as a unilateral trade barrier at odds with common but differentiated responsibilities.
• Ecological. Plantations for carbon can replace grasslands and natural forests, harming biodiversity and local users, so nature based solutions must be judged by ecology, not tonnes alone.

In practice

The European Union's Carbon Border Adjustment Mechanism

• What it does. The Carbon Border Adjustment Mechanism (CBAM), set up by Regulation (EU) 2023/956, makes importers of cement, iron and steel, aluminium, fertilisers, electricity and hydrogen buy certificates for the carbon in their goods at the European carbon price, minus any carbon price already paid in the producing country, so that European firms paying for carbon are not undercut.
• Its timeline. A transitional phase of reporting only ran from October 2023 to the end of 2025, and the definitive phase began on 1 January 2026. A simplification regulation of October 2025 exempts importers bringing in under 50 tonnes of covered goods a year, and sets the sale of certificates for 2026 imports to start on 1 February 2027, with the first annual declaration due by 30 September 2027; free allowances to European industry are phased out as CBAM is phased in.
• India's concern. Steel and aluminium make up most of India's exports in the sectors CBAM covers, so CBAM raises their cost unless Indian carbon pricing is recognised; India has called it a unilateral trade measure, and a credible Carbon Credit Trading Scheme is part of its answer.

India's tools

• CCUS. NITI Aayog published a policy framework for CCUS in 2022, and the Union Budget for 2026-27 proposed Rs 20,000 crore over five years to scale up capture in power, steel, cement, refineries and chemicals.
• Markets. India's compliance market under the CCTS, its list of activities that may sell credits abroad under Article 6.2 and its Joint Crediting Mechanism with Japan of August 2025 are covered in the note on India's climate action.
• Nature. The Green India Mission, MISHTI for mangroves and the NDC target of an additional forest carbon sink are India's main nature based programmes.

Issues and way forward

• Weak credits undermine markets. Credits that are not additional or permanent let buyers claim cuts that did not happen; the Article 6.4 standards, independent verification and buffer pools for reversal are the remedies.
• Capture is costly and slow. CCUS adds cost and uses energy, and most captured carbon so far has been used to push more oil out of old fields; public funding, carbon prices and shared pipelines and storage hubs are needed before it scales.
• Removal must not replace cutting. Engineered removal is expensive and small, so relying on it later is a bet on technology that may not arrive; IPCC pathways treat it as a supplement to deep cuts, not a substitute.
• Trade measures need negotiation. CBAM and similar measures in the United Kingdom and elsewhere risk fragmenting trade, so recognising each other's carbon prices and using climate revenue to support developing country exporters would reduce conflict, and COP30's new dialogue on trade gives a forum for it.
• Geoengineering needs rules before tests. Research on solar radiation modification is growing while governance is not, so a global framework under the United Nations should come before any outdoor experiment.

Common confusions

• Carbon capture and carbon removal. Capture stops new carbon dioxide reaching the air from a chimney; removal takes out carbon dioxide already in the air, and only removal can reverse an overshoot.
• Article 6.2 and Article 6.4. Article 6.2 is a bilateral route between countries under shared reporting rules; Article 6.4 is one central mechanism supervised by a United Nations body.
• Carbon tax and CBAM. A carbon tax prices emissions inside a country; CBAM is a charge at the border on the carbon in imports, linked to the European price.
• Offsetting and reducing. Buying a credit pays someone else to cut; it lowers the buyer's net figure but not its own emissions.
• Solar geoengineering and carbon removal. Solar geoengineering masks warming by reflecting sunlight and leaves the carbon in the air; removal tackles the cause.

For the exam

• Keyword bank: externality, polluter pays, carbon tax, cap and trade, carbon credit, additionality, permanence, leakage, corresponding adjustment, ITMO, Paris Agreement Crediting Mechanism, CCUS, carbon dioxide removal, nature based solutions, termination shock, Carbon Border Adjustment Mechanism.
• Previous year questions: Practise the previous year questions on this topic →
• Use in an answer:
  • Introduction with data: Carbon taxes and emissions trading systems now cover about 28 per cent of world emissions and raised over 100 billion dollars in 2024 (World Bank, State and Trends of Carbon Pricing 2025).
  • Introduction with a law or decision: The European Union's Carbon Border Adjustment Mechanism entered its definitive phase on 1 January 2026, putting a carbon price on imports of steel, aluminium, cement, fertilisers, electricity and hydrogen.
  • Conclusion: Markets cut emissions at least cost only when every credit is real, so India's carbon market and its Article 6 trades will be judged by the integrity of their accounting.
  • Conclusion: Capture, removal and nature can handle the emissions that are hardest to cut, but none replaces the main task of cutting fossil fuel use this decade.