Carbon credits are traded around the world
Carbon credits are traded around the world in a variety of markets and are used by businesses as an offset to their own greenhouse gas emissions. These reductions are often achieved through renewable energy, forestry and other natural-gas projects as well as carbon capture and storage (CCS) projects. Credit prices can vary significantly, from a few cents per metric ton of CO2 emissions for afforestation and reforestation credits to $100 or more for CCS projects. Currently, there are a number of ways to trade carbon credits, including through carbon exchange-traded funds or by directly purchasing and selling them in the over-the-counter market.
The voluntary trade carbon credits market is growing rapidly, driven by corporate net-zero goals and interest in meeting the international climate goals agreed to at the Paris Climate Accord. The biggest buyers are tech companies, airlines and oil and gas companies. But other industries, such as finance, are increasingly interested in carbon markets.
Most carbon markets are fragmented, with some regulated and some unregulated, and with different standards and methodologies for verification of emissions reductions. A key challenge for the market is establishing a standard process to validate a carbon project and its claims. There are a variety of options for verifying carbon projects, but the most widely adopted standard is set by Verra, a Washington-based nonprofit group that was founded in 2007 by business and environmental leaders to improve quality assurance in carbon markets. It includes accounting methods specific to each project type, independent auditing and a public registry system.
Carbon credits are traded around the world in a variety of markets
While the main purpose of a carbon credit is to offset GHG emissions, many projects also provide additional social and environmental benefits. These are called “co-benefits” and can include things like increased water quality, improved welfare for local communities and lower economic inequality. These secondary benefits can be valued by end buyers, and can add to the price of a credit.
There are a variety of ways to buy and sell carbon credits, including through brokers and direct trading between end buyers and suppliers. The majority of trades happen in the over-the-counter market. In some cases, a broker will purchase large volumes of carbon credits from suppliers and then bundle them into portfolios ranging in size from hundreds to thousands of CO2 equivalent tons and sell them on to end buyers. There are also a number of dedicated carbon exchanges, most notably New York-based Xpansiv and Singapore based AirCarbon Exchange.
The price of a carbon credit is determined by a combination of factors, including the attributes of the underlying project, its location, vintage and delivery date. These are important because a credit is only valid for five years, and buyers need to match the right supply of credits with their own offsetting requirements. However, inconsistencies across attributes means that matching a buyer with a supplier is typically a time-consuming and inefficient process transacted over the counter. Making carbon credits more uniform could help consolidate the OTC market and support a stronger market infrastructure for project developers, by introducing reference contracts with a limited set of consistent additional attributes.
