What is Carbon Credit Market?
Carbon Credit Market
There are a few different ways to reduce carbon emissions, and one popular option is to purchase credits from a voluntary market. These credits are traded by companies that want to offset their own greenhouse gas emissions, which they can’t eliminate immediately. A company may also buy carbon credits to neutralize residual emissions it won’t be able to eliminate in the future.
To find the right carbon.credit, the buyer must disclose its total greenhouse-gas emissions and set a plan to reduce them over time. It can then claim those reductions as its own, transferring them to the new credit owner by “retiring” the original credits from the marketplace (taking them off the market so that another company can’t claim them).
In a carbon credit marketplace, there are four main players: brokers, project developers, verification agencies and end buyers. Brokers act as middlemen between the project developer and the end buyer; they collect a portion of the purchase price from each party. Project developers create and manage a specific carbon-reduction project, often with government support. Verification agencies evaluate the project to ensure that it meets the requirements of its market and issues the necessary certificates, known as credits.
What is Carbon Credit Market?
Businesses that want to use carbon credits can do so through what is called a “cap-and-trade” market, where the government sets caps, or limits, on a particular industry’s emissions and regulates companies that want to adhere to those caps by buying or trading allowances. The market is also regulated by the state of California, which requires that a certain percentage of a business’s emissions come from reforestation projects.
The voluntary carbon-credits market is a global network of carbon credit buyers and sellers, many of whom are companies that have set internal goals for reducing their greenhouse-gas emissions. While governments and environmental organizations oversee the market to ensure compliance with Kyoto and Paris agreements, it is largely self-regulated by private investors, banks, companies and other market participants. The voluntary market also is governed by standards, which are guidelines established by respected NGOs that provide validation for different types of carbon projects.
There are many factors that influence the price of a credit, including the project type (reforestation, energy efficiency, carbon capture and storage, etc.), its geography, its vintage and the delivery time frame. The price can also be influenced by the additional co-benefits, or benefits to society, that a project provides.
Some of these benefits are social, while others are environmental. For example, a project may help to alleviate poverty in a remote community or improve water quality. These additional impacts can be valued at a premium by some buyers, and these types of credits trade at a higher price than industrial-type projects.
The integrity of the carbon market is a major concern, with the industry struggling with high transaction costs, inadequate risk-management services and low liquidity. To fix these problems, the carbon-credits industry needs to implement a digital process for registering, verifying and issuing credits. This would lower issuance costs, shorten payment terms, accelerate credit issuance and cash flow for project developers and allow for traceability. It would also enhance the credibility of corporate claims on the use of carbon credits, and ultimately encourage more market participation by end users.