The advent of climate change and rising carbon emissions have posed significant threats to our environment and way of living. There is a growing global consensus on the need to transition to a low carbon economy and achieve carbon neutrality by mid-century. This has led to the emergence of carbon finance and trading as effective market-based mechanisms to incentivize emission reductions and remove excess carbon from the atmosphere. The carbon market allows governments and private entities to buy carbon credits that represent one ton of carbon dioxide equivalent removed or avoided. This helps nations and organizations to comply with their emissions targets under international climate agreements in a cost-effective manner. However, uncertainties surrounding economic growth trajectories, stringency of future climate policies and technological disruptions continue to influence the demand and supply dynamics in this evolving marketplace. The global climate and carbon finance market is a financial system designed to encourage businesses and countries to reduce their greenhouse gas emissions. The market operates on the principle of 'cap and trade', where a limit is set on allowable emissions and entities are allowed to buy and sell 'carbon credits' to meet these limits. Carbon credits are a type of tradable certificate that provides the holder of the credit the right to emit one tonne of carbon dioxide or the equivalent amount of a different greenhouse gas.
Market Dynamics
The global climate and carbon finance market is primarily driven by the growing international commitments to achieve net-zero emission targets. Stringent regulations and carbon pricing mechanisms established via carbon trading schemes are compelling industries across regions to curb GHG ,Greenhouse Gas emissions. Favorable governmental initiatives and incentives for low-carbon projects especially in renewable energy and energy efficiency sectors are creating new opportunities. However, the lack of a unified global pricing mechanism and regional differences in carbon policies continue to hinder the market's full potential. Also, pricing volatility owing to macroeconomic uncertainties poses challenges. Nonetheless, the market is expected to gain further momentum with the rising focus on ESG, Enviornmental, Social and Governance investments and evolving carbon border tax adjustments. The market is heavily influenced by regulatory policies and frameworks at both national and international levels. Policies aimed at reducing greenhouse gas emissions, such as the Paris Agreement, drive the demand for carbon credits.
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