Can Carbon Credits Be Traded Internationally?

The global carbon finance market is finally getting some momentum as a new generation of players joins existing ones that have been involved in the industry for decades. However, several challenges persist that keep the market from scaling up to its potential. These include a lack of transparency in transactions and an insufficient understanding of how carbon markets work. A growing interest in voluntary carbon markets, as well as the efforts of several players to scale and standardize operations, suggest that carbon finance is poised to enter the mainstream.

In a nutshell, a carbon credit is an offset that represents the reduction or avoidance of greenhouse gas (GHG) emissions. The goal is to mitigate the impact of climate change on our planet and protect natural ecosystems.

For example, a company may need to buy carbon.credit from another company to meet its regulatory requirements. This is a form of “carbon trading.” A carbon credit can be sold in the global carbon markets and then used by a company to offset its GHG emissions. The international carbon market is not new – it began with the Clean Development Mechanism of the Kyoto Protocol in 1997.

Carbon credit prices are influenced by numerous factors, including the type of underlying project that is producing them. For example, the price of credits produced by a carbon sequestration project is typically higher than those from an energy efficiency project. The price is also impacted by the geography, vintage, and delivery time of the credit. Some carbon projects also deliver additional co-benefits, which add further value to the credit.

The complexity of carbon credits makes the process of putting a price on them difficult. This is partly why many players – such as brokers and project developers – take on multiple roles in the carbon market. For example, they might act as traders and also develop projects or have finance arms that invest in a variety of carbon projects. This overlapping of roles can lead to confusion and create opportunities for fraud.

To reduce these concerns, there is a need for improved market integrity and standardization. For instance, there should be a clear set of core carbon principles and a taxonomy that includes additional attributes to classify carbon credits. This would help ensure that all underlying projects adhere to quality thresholds and that credits are retired when they reach the end of their life.

This kind of standardization would also speed up trades and reduce transaction costs, particularly in the secondary market, by ensuring that all underlying projects are of the same quality and that only credits that meet specific standards can be traded. It would also reduce the risk of double counting, where a carbon credit is sold once to a buyer in one country and then claimed again by the seller in a different jurisdiction. This is a significant concern in both the voluntary and regulated markets.