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Carbon Credits

How markets put a price on pollution—and whether blockchain can fix a broken system

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Putting a Price on Pollution

The atmosphere is a commons problem. When you burn fossil fuels, the cost is borne by everyone (climate change), but the benefit is yours (cheap energy). Economics 101: tax negative externalities. Enter carbon credits—tradable permits giving you the right to emit 1 ton of CO2.

Two markets emerged: Compliance markets (governments force polluters to buy credits) reached $850B in 2024. Voluntary markets (companies buying offsets for "net zero" claims) hit $2B but face fraud scandals. Blockchain promises transparency. Reality: it's complicated.

How Carbon Credits Work: The Theory

Simple concept, complex execution:

1. Set a Cap

Government or standard body determines total allowed emissions. Example: EU limits steel industry to 100M tons CO2 annually. Declining cap each year forces decarbonization.

2. Issue Credits

1 credit = right to emit 1 ton CO2. Credits distributed via auction or free allocation. Companies that reduce emissions below their cap can sell surplus. Dirty companies must buy more.

3. Trade Creates Price Discovery

Market determines carbon price. If reducing emissions costs $50/ton but credits cost $30, you buy credits. If reduction costs $20, you cut emissions and sell credits at $30. Efficiency through markets.

🌍The Core Insight

Carbon credits are a market-based solution to climate change. Instead of government mandating how each company cuts emissions (expensive, inflexible), let companies trade pollution rights. Cheapest reductions happen first. Economic theory says this minimizes cost of decarbonization. Reality check: it works when caps are tight and enforcement is real. Otherwise, it's greenwashing theater.

Market Size: $850B and Growing

Two parallel universes with vastly different scales:

$850B

Compliance Markets (2024)

• EU ETS: $700B (largest)

• California: $25B

• China ETS: $85B (coal power only)

• RGGI (US Northeast): $5B

Legally binding. Real consequences. Actual emission reductions.

$2B

Voluntary Markets (2024)

• Corporate offsets for "net zero"

• No legal requirement

• Quality varies (forest to direct air capture)

• Verra, Gold Standard verify projects

Scandal-prone. Greenwashing common. But growing 20%+ annually.