Corporate emissions targets are tightening. Whether it is a net-zero commitment tied to SBTi, an ESG reporting obligation, or supply chain pressure from global buyers, more organizations are being asked to demonstrate measurable climate action, not just pledges.
Yet for most procurement, sustainability, and finance teams, carbon trading still feels opaque. The terminology is technical, the market structure is fragmented, and the integrity questions are real. Buying the wrong credits can expose a company to reputational risk and regulatory scrutiny.
Understanding what is carbon trading, how the two main market types operate, and what distinguishes a high-quality carbon credit from a low-quality one gives buyers and traders the foundation they need to participate with confidence. This guide breaks it down clearly.
What is Carbon Trading?
Carbon trading is a market-based mechanism that allows organizations to buy and sell units representing greenhouse gas emissions reductions or removals. Each unit, commonly referred to as a carbon credit, represents one metric ton of carbon dioxide equivalent (tCO2e) that has been reduced, avoided, or permanently removed from the atmosphere.
The core logic is straightforward: not every organization can reduce emissions at the same speed or cost. Carbon trading lets those who can reduce emissions faster generate credits and sell them to those who need more time or flexibility, so the overall climate outcome is still achieved, but more efficiently across the economy.
For corporate buyers, carbon credits are typically used to cover residual emissions that cannot yet be eliminated through operational changes, as a transitional tool while deeper decarbonization is underway, or as part of a broader portfolio strategy to meet net-zero aligned commitments.
How Does Carbon Trading Work?
The mechanics behind carbon trading vary depending on the market type and the type of project generating the credits. Three foundational concepts apply across most systems: the cap mechanism, the baseline mechanism, and the verification process that gives credits their credibility.
1. The Cap Mechanism
In compliance markets, regulators set a total limit, or cap, on how much greenhouse gas a sector or set of regulated entities may collectively emit. This cap declines over time, creating scarcity and therefore economic pressure to reduce emissions.
Entities that emit below their allocation can sell excess allowances to those that exceed theirs. The price of allowances is determined by supply and demand, so a tighter cap drives higher prices and stronger incentives for abatement.
2. The Baseline Mechanism
In voluntary and project-based markets, carbon credits are generated by comparing actual emissions to a counterfactual baseline, which is what emissions would have been without the project. If a cookstove project reduces household biomass burning, the credit is calculated against the emissions that would have occurred using traditional cooking methods.
Establishing a credible, conservative baseline is one of the most technically demanding parts of any carbon project. It requires rigorous assumptions about regional energy grids, land use patterns, or waste decomposition rates, depending on the project type.
3. The Role of MRV in Validating Carbon Credits
MRV, which stands for Monitoring, Reporting, and Verification, is the process that ensures a carbon credit represents what it claims to represent. Without robust MRV, there is no reliable way to confirm that emissions reductions or removals actually occurred at the scale reported.
A credible MRV framework includes continuous or periodic monitoring data, standardized reporting protocols, and independent verification by an accredited third-party auditor (VVB) before credits are issued on a recognized international carbon certification standard. In markets where integrity is under scrutiny, MRV quality is often the single most important factor separating high-value credits from those that carry reputational or environmental risk.
Read Also : Indonesia Carbon Credit Landscape: Market Structure, Standards, and How to Buy
The Two Types of Carbon Markets You Need to Know
Carbon markets are commonly divided into two categories based on who is required to participate and what rules govern credit eligibility. Understanding both is essential for any organization designing a credible carbon procurement strategy.
1. Compliance Carbon Market
Compliance carbon markets are created and enforced by government regulation. Participation is mandatory for covered entities, typically large industrial emitters, power producers, or aviation operators, depending on the jurisdiction.
The European Union Emissions Trading System (EU ETS) is one of the most established examples globally, covering thousands of installations across more than 30 countries. Allowances in compliance markets are issued by regulators, tracked in government registries, and subject to annual reconciliation.
For businesses operating across multiple jurisdictions, compliance obligations can stack. A company with operations in both a regulated domestic market and a country with an active emissions trading scheme may need to manage separate compliance requirements simultaneously.
2. Voluntary Carbon Market
The voluntary carbon market (VCM) operates outside mandatory regulatory frameworks. Companies, financial institutions, and even individuals participate by choosing to purchase carbon credits as part of net-zero commitments, ESG disclosures, or product-level carbon neutrality claims.
Credits in the VCM are generated by projects ranging from avoided deforestation and renewable energy to soil carbon sequestration and engineered carbon removal, including biochar. Unlike compliance markets, the VCM relies on recognized international carbon certification standards and publicly auditable carbon registries to ensure environmental integrity.
The VCM has faced scrutiny in recent years over additionality, permanence, and over-crediting concerns. As a result, frameworks such as the Integrity Council for the Voluntary Carbon Market’s Core Carbon Principles (ICVCM CCP) are increasingly used by buyers to screen for higher-integrity credits that meet a verifiable threshold.
Carbon Trading in Indonesia: Regulations and Latest Developments
Indonesia’s carbon market has entered a significant new regulatory phase. Presidential Regulation No. 110 of 2025 (Perpres 110/2025), which replaced the earlier Perpres 98/2021, now provides the updated legal foundation for the national carbon economic value (NEK) framework, covering both the compliance and voluntary segments of Indonesia’s carbon market.
Under Perpres 110/2025, the mechanisms for carbon trading, carbon levies, and performance-based climate finance are more clearly defined, with oversight roles assigned to sector-specific ministries and the national financial authority (OJK) supervising carbon market transactions. Regulated entities in high-emitting sectors such as energy, industry, and forestry are subject to mandatory reporting and, in some cases, participation in the national emissions trading scheme.
For international buyers, Indonesia’s regulatory clarity matters because it affects the eligibility of domestic carbon credits under bilateral agreements and Article 6 of the Paris Agreement. Credits transacted under a transparent, government-registered framework carry stronger provenance documentation, which is increasingly demanded by corporate buyers with SBTi-aligned or high-integrity procurement policies.
Indonesia is also a significant source of nature-based and land-use carbon credits given its forest cover and agricultural scale. Carbon trading opportunities connected to biochar production from agricultural residues, for example, fit within this regulatory landscape as a measurable, permanent removal pathway that complements Indonesia’s national emissions reduction targets.
Who Can Participate in Carbon Trading?
Carbon trading is no longer a niche activity for large multinationals or specialized commodity traders. The landscape of participants has broadened considerably, and understanding where different organizations fit matters for both procurement strategy and project development.
On the demand side, corporate buyers are the primary driver of voluntary market activity. These include companies with public net-zero targets, businesses responding to customer or investor ESG requirements, financial institutions managing climate-related portfolio risk, and organizations operating in sectors facing near-term compliance obligations.
On the supply side, project developers generate carbon credits by implementing activities that reduce or remove emissions, and these projects must be validated and verified before credits can be issued. Aggregators, brokers, and trading desks facilitate transactions between buyers and sellers, while advisory firms help corporates design procurement strategies that align with recognized standards and reporting frameworks.
For organizations new to carbon trading explained in this context, the most important first step is defining the purpose of procurement clearly. Whether the goal is compliance coverage, net-zero portfolio management, or supply chain claims, the type of credit, the registry it is listed on, and the MRV methodology behind it will determine whether the purchase holds up to scrutiny from auditors, regulators, and public stakeholders.
Schedule a Discussion with the Planet Carbon Team
Navigating the carbon market as a corporate buyer or project developer requires more than a general understanding of how the system works. The details matter: which methodology applies to a specific project type, how credits are priced in the current market, what level of MRV documentation satisfies a particular buyer’s procurement policy, and how Indonesian regulatory requirements interact with international certification standards.
Planet Carbon works across the full value chain of carbon trading for biochar-based projects, from project development and validation through to commercialization. If your organization is evaluating carbon credit procurement, assessing a biochar project for credit generation, or trying to understand how Perpres 110/2025 affects your compliance position, the Planet Carbon team is a practical starting point for that conversation.
Reach out through the Planet Carbon website to schedule a working discussion with the team. There is no one-size-fits-all answer in this market, and a focused conversation about your specific context is usually the most efficient way to get clarity on the next step.
Referensi:
- Pemerintah Republik Indonesia: Peraturan Presiden Nomor 110 Tahun 2025 tentang Nilai Ekonomi Karbon – https://peraturan.go.id/id/perpres-no-110-tahun-2025
- Integrity Council for the Voluntary Carbon Market (ICVCM): Core Carbon Principles (CCP) framework for voluntary carbon market integrity – https://icvcm.org/the-core-carbon-principles/
- Science Based Targets initiative (SBTi): Corporate Net-Zero Standard and guidance on carbon credit use within science-based targets – https://sciencebasedtargets.org/net-zero
- GHG Protocol: Corporate Accounting and Reporting Standard, including guidance on Scope 1, 2, and 3 emissions and carbon market instruments – https://ghgprotocol.org/corporate-standard
- International Carbon Action Partnership (ICAP): Overview of global emissions trading systems and cap-and-trade mechanisms – https://icapcarbonaction.com/en/ets
Read Also : What is a Carbon Offset? How It Works, Benefits, and Relevance for Business