Trade Carbon Credits
If you’re an investor interested in carbon credits, there are a few things you should know before making a decision. As with any investment, you should talk to a financial advisor before taking action. SmartAsset’s free tool can help you find one in your area.
The vast majority of trade carbon credits occurs on the voluntary market. It’s a growing sector that sees demand from both individuals looking to offset their own emissions and companies aiming to meet corporate sustainability goals and hedge against the risk of a carbon tax. Supply comes from projects certified by carbon standards that generate avoidance or removal credits and from government-sponsored programs. Buyers can be private individuals seeking to offset their own emissions, businesses aiming to achieve a net-zero footprint, or investors looking to make a profit from rising prices for carbon-related assets.
Carbon credit markets are regulated by the governments that oversee them. A compliance market is set up when a regulator sets an allowance or limit on the amount of emissions allowed, and then encourages entities to buy or save credits from each other in order to stay below this limit.
How to Trade Carbon Credits
Many countries have established carbon trading schemes to reduce their emissions in the short term. However, the global voluntary carbon market is not yet large enough to have a significant impact. Limiting the rise in global temperatures to 1.5 degrees Celsius will require a much larger and faster reduction in greenhouse-gas emissions. A strong and active voluntary carbon market can accelerate this process by enabling buyers to connect with suppliers, transmit signals of demand, and foster scaled-up supply.
In the compliance market, carbon credits are priced according to their underlying project and other attributes such as geography, vintage (older projects typically have lower prices), and delivery time. To link this supply with the demand, retail traders—similar to those in other commodity markets—purchase bundles of carbon credits from a number of different suppliers and sell them to buyers, for a commission. This is done through a series of private conversations and over-the-counter deals. A number of exchanges, such as Xpansiv CBL and ACX, have been trying to simplify the trading by creating standard products that ensure some basic specifications are met.
The current market is highly fragmented and illiquid, with buyers and sellers often communicating through brokers or over-the-counter trading. This is largely due to the fact that carbon credits are highly heterogeneous, with each credit having its own set of attributes. For example, a carbon credit can be classified as nature-based or tech-based, and it can have additional attributes such as the type of underlying project, its geographic location, or whether it contributes to one or more of the UN’s Sustainable Development Goals. To increase efficiency and reduce the cost of this transactional system, a number of third-party organizations are establishing standard products that guarantee a specific set of attributes for carbon credits. This could facilitate price discovery and allow for the creation of liquid reference contracts that can support supplier financing.