Where to Trade Carbon Credits
There are two main ways to trade carbon credits: the regulated market and the voluntary market. The regulated market is set by “cap-and-trade” programs at the state and national level, which require companies to reduce their greenhouse gas emissions within a certain limit. The companies that emit less than their allotted number of emissions may then buy credits from those who have more – effectively trading them. In this way, the regulated markets help to control overall global emissions levels.
The broader, voluntary carbon market is for businesses and individuals that want to operate on a carbon-neutral or even carbon-negative basis. These businesses and individuals can purchase trade carbon credits from those who have reduced their emissions from sources such as regenerative agriculture and not chopping down trees for timber, which are both methods of carbon storage. These carbon credits can be purchased for a variety of reasons, from funding energy projects that offset their own carbon footprint to simply buying them as an alternative to purchasing carbon-dioxide emitting electricity.
Carbon traders operate much like any other commodities broker, facilitating both small purchases and larger transactions between buyers and sellers. Many brokers specialize in helping companies identify a portfolio of offset credits, and some develop their own carbon-reduction projects to generate credit for sale to buyers. It’s important for potential carbon credit buyers to closely review the carbon credit portfolio that a retailer has on offer, and to be wary of any credits from projects that a retailing company owns or developed.
How and Where to Trade Carbon Credits
For those purchasing credits in the regulated carbon market, it’s also critical to understand how a specific carbon credit is earned and verified. Carbon credits are rated by their “quality” based on how thoroughly they have been vetted, and those that have been sourced through the Clean Development Mechanism (CDM) are considered high quality.
These high-quality credits are worth a premium in the market and can be used to meet compliance targets under a cap-and-trade program. They’re called Certified Emissions Reductions, or CERs.
As the global effort to reduce greenhouse-gas emissions continues, it’s likely that the demand for CERs will continue to increase as more nations and businesses implement their own carbon market policies. However, the complexities of establishing an appropriate carbon trading policy and building efficient and transparent markets can pose significant challenges for any business looking to invest in carbon credits.
A well-functioning carbon market requires a clear price signal, liquid reference contracts for both spot and futures, supplier financing, and supply-chain risk management services. The market also needs to improve its ability to match buyers and suppliers. One way to do this is by establishing common quality thresholds for carbon credits and standardizing additional attributes in a carbon credit taxonomy that would be hosted and curated by an independent third party. This would ensure that all credits adhere to core carbon principles and meet rigorous environmental and market integrity standards. This approach is a crucial step towards creating a robust, scalable carbon market.