Two completely different things
Compliance allowances exist because a government caps emissions and requires covered installations to surrender one allowance per tonne emitted. The UK ETS, and the EU ETS before it, work this way. Supply is fixed by the cap, demand comes from legal obligation, and the price is a genuine market price for a genuinely scarce right. A power station that does not surrender enough allowances faces a penalty far above the market price.
Voluntary credits are certificates representing a claimed tonne of emissions avoided or removed somewhere — a protected forest, a cookstove programme, a direct air capture plant. Nobody is legally required to buy them. They are bought to make claims about being carbon neutral.
Confusing these two is the single most common error in discussions of carbon markets. The first is a regulated compliance instrument with a hard cap; the second is a certificate whose quality depends entirely on the integrity of a methodology.
The additionality problem
A voluntary credit is only meaningful if the emission reduction would not have happened anyway. This is called additionality, and it is extremely difficult to verify, because it requires proving a counterfactual.
Investigations by journalists and academics into forest protection credits — REDD+ — concluded that a large share of credits issued under some methodologies did not represent real additional reductions, typically because baseline deforestation rates had been overstated. The resulting loss of confidence hit voluntary credit prices and volumes hard, and several major corporate buyers stepped back.
Removal credits, where carbon is physically taken out of the atmosphere and durably stored, are harder to fake and trade at much higher prices.
UK specifics
The UK ETS covers power generation, energy-intensive industry and domestic aviation. The cap tightens over time, which is the mechanism intended to drive the price and therefore decarbonisation. UK and EU allowance prices have diverged notably since separation, and linkage between the two schemes has been the subject of ongoing negotiation.
The Carbon Border Adjustment Mechanism — the EU's from 2026, and a UK equivalent planned — will charge importers for the embedded carbon in certain goods, extending the price signal beyond domestic producers.
How you would actually trade it
Compliance allowance trading is for covered installations and financial participants with registry accounts and exchange access. Retail exposure exists through a small number of carbon ETFs holding allowance futures — which are subject to roll costs and to the policy risk of the cap being loosened.
Voluntary credits are bought through brokers or platforms, with the critical work being due diligence on the methodology, the registry, the verification body and the vintage. A credit is retired in the registry when used, which is what prevents double counting — check retirement actually happens.
For most corporate buyers the honest advice is that reducing emissions is the product and credits are a residual, and that buying cheap avoidance credits carries real reputational risk.
What goes wrong
- Pure policy risk. The asset exists because a government says so and can be diluted by a decision to issue more.
- Integrity risk in voluntary markets, where credits have been shown not to represent real reductions.
- Reputational risk. Greenwashing claims based on poor-quality credits have attracted regulatory attention from advertising and competition authorities.
- Price volatility driven by policy announcements rather than fundamentals.
- Registry and double-counting risk in less rigorous schemes.
This entry describes how a market works. It is not a recommendation, a price forecast, or advice about whether this belongs anywhere near your money. How entries are written.