VLP Legal Press#17
Carbon Markets: A Simple Overview
🪸Climate change has been a pressing issue for many years. To address it, people and governments have taken action - from small everyday habits like saving energy to big changes in policies and business practices.
🌱One important approach is through carbon markets. These involve ideas like carbon trading and carbon credits. They may sound like financial terms, but they are closely connected to protecting the environment. They’re based on the principles of putting a price on carbon emissions to create an economic incentive for reducing them.
What Do These Terms Mean?
Carbon credits: a permit to emit a specific amount of carbon dioxide or other greenhouse gases. One carbon credit allows its holder to emit 1 metric ton of carbon dioxide equivalent.
Carbon offsets: funding a project that removes or prevents a ton of carbon dioxide equivalent from entering the atmosphere – to balance out a ton of your own emissions. This is the process of using carbon credits to compensate for emissions you have created.
Carbon trading: buying and selling carbon credits in regulated or voluntary markets.
Carbon markets: a system where companies, governments or individuals buy and sell carbon credits. There are two main types – compliance and voluntary market.
Compliance market: set up by government/international treaties and regulated by law. In some countries, companies must keep emissions below a set limit, if they emit less, they can sell extra credits; if they emit more than the limit, they must purchase carbon credits (also known as cap-and-trade system).
Voluntary market: driven by companies, individuals, and organizations who voluntarily choose to take climate action for sustainability goals/corporate social responsibility. They purchase credits, and the credit flows into projects that generate emission reduction (such as tree-planting).
Key International Terms
Paris Agreement: a legally binding international treaty on climate change signed in 2016. Its main goal is to limit the rise in global average temperature this century to well below 2°C above pre-industrial levels.
Nationally Determined Contribution (NDC): what a country promises to do to reduce its national greenhouse gas emissions and how it plans to cope with effects of climate change.
Article 6 of the Paris Agreement: an article in the Paris Agreement that provides a framework for countries to cooperate on climate action through market and non-market mechanisms, helping them achieve their NDCs. The framework includes international trading of greenhouse emissions reduction credits (GHG ER) between countries, where GHG ER credits achieved in one country can count towards NDC targets of another country in exchange for payment.
Internationally Transferred Mitigation Outcomes (ITMOs): authorized GHG ERs approved for international transfer between countries under Article 6.
In Cambodia
While Cambodia does not currently have a domestic cap-and-trade compliance market for businesses, it is actively involved in the voluntary market - developing carbon offset projects, primarily in forestry and clean energy sectors, to reduce greenhouse gas emissions and generate tradable carbon credits.
Cambodia’s legal framework focuses on international carbon trading, with the launch of Operations Manual for Implementation of Article 6 of the Paris Agreement on Climate Change in Cambodia (“Operations Manual”) on 14 December 2023. This Operations Manual establishes eligibility criteria and provides clarity for carbon offset projects in Cambodia.
We will explore the Operations Manual in our next VLP Legal Press!
This is for general reference only and does not constitute legal advice. For further guidance, contact us at: