EXPLAINED: What the carbon market is, how it works and what you need to know

Global trends are pressuring companies to reduce their emissions, either via consumer expectations or government regulations.

But for many businesses, emissions are a built-in cost with no quick solution with current technologies, such as the emissions from jet fuel in the aviation industry.

Those companies need to offset their emission through a third party, which is where the carbon market comes in.

Carbon abatement projects recognised by the government's carbon market regulatory - the Clean Energy Regulator (CER) - are awarded an Australian Carbon Credit Unit (ACCU) for every tonne of carbon abated.

Along with handing out ACCUs, the CER is also responsible for registering abatement projects, running carbon credit auctions and managing carbon abatement contracts.

ACCUs can be traded or sold - but only within Australia - and like ASX or the EYCI, the market value of an ACCU fluctuates due to supply and demand.

There are three groups of players within the carbon market - the CER, voluntary buyers and compliance buyers who fall under the safeguard mechanism.

The CER is by far the largest player, but is expected to wind down its involvement as the private sector picks up.

It holds auctions for ACCUs, with contracts up for grabs to sell carbon credits back to the government.

The process functions like a reverse silent auction - the CER will announce the total number of credits it is seeking to buy and sellers put forward their price.

The auction contracts are generally structured so that a set number of ACCUs are delivered at a set price, every year for several years.

The compulsory buyers are 219 businesses responsible for almost a third of Australia's emissions, which are legally required to reduce their carbon footprint by a law called the Safeguard Mechanism.

The businesses have an annual baseline level of emissions they can produce without penalty.

Anything above that, and they are required to offset the emissions through the carbon market.

The baseline will continue to drop lower and lower year-on-year.

This will force companies to either purchase more carbon credits or make operational changes to reduce emissions.

The voluntary buyers are organisations that are not under any obligation to reduce emissions, but have chosen to tap into premium markets and conscious consumers.

Sales to voluntary and compulsory buyers can be either long-term contracts or "spot market" purchases.

For example, a large mining company that requires 100 ACCUs to meet its Safeguard obligations can make a one-off purchase.

Alternatively, the company could strike an agreement to buy 50 ACCUs every year for five years, from two different farmers.

These deals are often negotiated through brokers, but can be done directly with the companies.

The ACCUs are exchanged via a digital wallet, which allows the CER to keep track of the credits.

When companies cash in the credits to demonstrate their emission reduction efforts, they surrender credits to the government.

The carbon abatement is recorded and the ACCUs are then deleted from the system.

During the past decade, about 140 million ACCUs have been awarded.

About 30 million of those are in holding accounts.

The voluntary market purchases roughly 2 million credits a year and the compulsory market only purchases about 400,000 annually (pre-Safeguard changes).

Some farmers may also choose to retain their ACCUs to maintain a carbon neutral status.

This is a practice referred to as "insetting" - allowing them to gain access to more markets or sell their goods at a premium.

But it's important to remember there is no double dipping on insetting credits and they can't be surrounded (to gain carbon neutral status), and then sold (which would be claiming the carbon abatement twice).

The market reached a high of $39 an ACCU earlier this year, but is currently sitting around $30.