The market for carbon credits – which includes carbon offsets – is on track to be one of the biggest in the world. But it is also a complicated process that requires careful data and analysis, ensuring that only high-quality, verified carbon credits are bought.
There are several players involved in a carbon credit transaction: governments, companies, environmental groups and non-governmental organizations (NGOs). Governments, for example, can cap the amount of greenhouse gas emissions that companies can emit, or sell extra permits to companies to encourage them to cut their carbon use.
Companies and NGOs can buy trade carbon credits to reduce their own emissions, or they can sell them to other companies for a profit. They may do this through a market-based approach such as cap and trade, or through voluntary markets.
Voluntary markets are emerging in many parts of the world, and can provide a cheaper way for companies to meet their climate goals. They are especially helpful to large firms and utilities, who need to cut emissions at a rapid pace to comply with their regulations.
As with other markets, carbon credits can fluctuate wildly, based on supply and demand. The price of each credit depends on a variety of factors, including the nature of the underlying project that is issuing the credits.
When a company decides to trade in carbon credits, it has to make sure that the project is well-designed and well-managed, and that it will have a positive impact on the environment. These factors are reflected in the certification standards that the project must meet.
For instance, a reforestation project that meets UN Sustainable Development Goals will have a higher value than a carbon offsetting project that doesn’t. In addition, the size of the underlying carbon project can affect the price of the credit as well.
Despite its complexity, however, trade in carbon credits is an important part of global efforts to reduce greenhouse gases and slow climate change. The market is growing, and will continue to do so as governments work to achieve their national climate goals.
While there are numerous voluntary markets, only a few of them have become standardized, which means they have a common time frame, measurement and price point. This helps buyers to avoid confusion and ensures that the credits they purchase are valid in a particular market, which could protect them from potential accusations of greenwashing.
There are a number of exchanges and trading platforms where traders can trade carbon credits. Some of them offer standardized products that are preferred by traders and financial players who are anticipating massive growth in demand for carbon credits. Others provide a broader range of standardized and non-standardized products.
A standardized product allows buyers to find the underlying project that is most relevant for their needs, as well as check the quality of the credit being purchased. It also helps them to protect themselves from accusations of greenwashing if the underlying project is not a good fit for their requirements, thereby avoiding a costly audit or risking the loss of their funds.