Carbon Credits Trade
Carbon credits are a kind of permission slip for emissions reduction projects. When a company buys a credit, they gain permission to generate one metric ton of reduced or avoided greenhouse gas (GHG) emissions. Companies who end up with extra credits can sell them, or trade them horizontally, to other companies that need to offset their own GHG emissions.
Carbon markets are complex and global, and the credits themselves can have many attributes, which affect their price. This is partly because different project types require different methodologies to quantify their impact, and buyers often value additional attributes differently. The lack of clear pricing information creates the potential for fraud and misappropriation. It also makes it difficult for buyers to know if they are paying a fair price and for suppliers to manage the risk of financing and working on a carbon-reduction project without knowing what someone will ultimately pay for their credits.
Voluntary carbon markets are gaining speed and traction, as more corporations announce their net-zero goals or look for ways to hedge their financial risks as they move toward a low-carbon future. The global market for trade carbon credits is expected to grow to more than $50 billion per year by 2022.
Carbon Credits Trade Finance
There are a number of players that make up the carbon-credits trade finance ecosystem, including standard-setting organizations, brokers, project developers, and buyers. There are four key types of projects that produce carbon credits. Each type of project requires a specific set of verification rules and accounting methods to capture the impacts on the climate. These methodologies are set by standards-setting organizations, such as Verra, which is the most widely used carbon-credit verification system.
Once a project is verified and its credits are issued, they can be traded on a carbon-credit exchange. These exchanges are primarily regulated by governments and are governed by the same regulatory framework as other securities, with some additions to support carbon-credit trade finance. There are also a number of carbon-credit exchange-traded funds, or ETFs, which are traded through a regular stock brokerage account and can be purchased by individuals.
To enable carbon-credit trading, a robust infrastructure needs to be in place. That includes trade, post-trade, and data infrastructures, as well as supply-chain financing and funding for project developers. Resilient and scalable infrastructure will help to list and trade reference contracts, support post-trade activities, reduce counterparty default risk, facilitate clearinghouse functions, provide funding for project developers, and increase data availability. Finally, the industry needs to establish further guidance on the appropriate use of carbon offsets, so that offsetting does not undermine efforts to mitigate GHG emissions in the first place or cloud corporate claims. With these improvements in place, the voluntary carbon market can become a powerful tool for businesses, governments, and investors to meet their climate-action goals.