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8 The Carbon Market: A Primer for Airports 1.2 Overview of Carbon Markets and Instruments Key Takeaways for Airports The United States does not have a mandatory cap-and-trade program in place and under most legislative proposals in the past, airports have not been targeted enti- ties that would be required to reduce or account for their GHG emissions. Other regulated entities, like electricity providers, would be expected to pass the cost of carbon compliance onto consumers downstream, such as airports. Engaging in activities that reduce, avoid, or sequester emissions may present an opportunity to "earn" carbon offset credits, which are tradable commodities that represent GHG reductions. Demand for carbon offset credits exists in both the voluntary and mandatory carbon markets. At the outset, there are a few concepts and terms that should be understood. A carbon credit is a term that is often used to describe, correctly and incorrectly, a wide variety of tradable envi- ronmental instruments (i.e., a representation of some action or inaction that has environmen- tal consequences). For the purposes of this Primer, more specific terms will be used depending on the instrument of reference. Generally, a carbon credit refers to a tradable certificate repre- senting one tonne of CO2e and is classified as either an "allowance" or an "offset." Figure 1 sum- marizes the specific types of carbon instruments and their applicability in different markets. "Allowances" are usually created as the result of a cap-and-trade system. Under a cap-and-trade system, a mandatory limit on GHG emissions is set by a governing body. Regulated entities within that system must surrender allowances equivalent to the amount that they emit and are permit- ted to find least cost ways to meet the limit. These regulated entities are sometimes referred to as "points of regulation." Generally, the mandatory limit, referred to as "the cap," is set by the gov- ernmental body and applies to a certain sector or group of sectors in the economy. Tradable emission allowances are distributed by the government in an amount equal to the total emis- sions permitted by the cap. Generally, the cap, or the number of allowances distributed, declines over time, thus ensuring reductions of total GHG emissions by the covered sectors collectively. Traditionally, airports and other transportation ports have not been targeted as sectors covered under the mandates. However, airports and other end users of fuels and electricity may be indi- Carbon Market Market types: compliance regulatory driven, mandated demand Compliance Voluntary voluntary self driven Instrument types: allowance compliance instrument under cap & trade Offset Offset offset credit created from Allowance Credits Credits reduction project, compliance & voluntary instruments Figure 1. Carbon markets and instruments.