How Does Carbon Credit Trading Work?

Website design By BotEap.comCarbon credits are a way for businesses to offset their emissions by paying another company. The credit is based on the amount of greenhouse gases the offsetting project has reduced. A carbon credit is also a tool that states and businesses can use to meet their goals under the Paris Climate Agreement, which calls for reducing global temperatures below 2 degrees Celsius.

Website design By BotEap.comThe voluntary market for carbon credits has grown rapidly this year, driven by a wave of corporate net-zero goals and the Paris Climate Agreement. Traders and financial players are seeking to take advantage of the demand. But the growing complexity of the market threatens its integrity and could lead to greenwashing, fraud and money laundering.

Website design By BotEap.comThere are many factors that influence the price of a carbon credit, and each credit is unique. The type of underlying project is one of the most important, as each project has its own unique methodology for calculating the amount of CO2 absorption it achieves through its activities. Other attributes that can affect the price of a carbon credit include its vintage (the older the project is, the lower the price), geography and delivery time.

Website design By BotEap.comSome of these projects are part of what is called a “cap-and-trade” program, where regulators set an overall limit for a certain pollutant or group of pollutants, and companies must either reduce their emissions or purchase credits to stay below the cap. There are currently several cap-and-trade programs in operation around the world, including Canada, Europe and the United States.

Website design By BotEap.comThese programs are often designed to cut emissions in specific sectors, such as power generation or transport, or for particular geographies. In the United States, for example, the Environmental Protection Agency runs a cap-and-trade program to cut emissions of sulfur dioxide, which contributes to acid rain.

Website design By BotEap.comIn addition to buying or selling carbon.credit, businesses can also offset their emissions by reducing them at their facilities. This is known as “on-site” offsetting, and it usually involves things like installing solar panels or driving a hybrid vehicle. Offsetting through these channels is generally the most cost-effective way to get a business on track to its carbon emission goals.

Website design By BotEap.comTo help connect buyers and sellers, the voluntary carbon market includes brokers and retail traders. These traders buy large bundles of carbon credits from suppliers and then sell them in smaller portfolios to end buyers, usually for a small commission. Typically, the brokers are using their expertise to match up buyers and sellers that would not otherwise find each other.

Website design By BotEap.comIn order to streamline the process, a number of different market players are working together to improve the quality and transparency of carbon credits. These efforts range from creating standard attributes for credits, to making them easier to track and verify. These initiatives, led by market leaders like S&P Global Platts, are intended to create a more efficient and transparent marketplace for carbon trading. Standardizing the attributes of credits, as well as providing a clear price signal for them, is expected to help prevent fraudulent trading.