Can Carbon Credits Be Traded
Carbon markets are global marketplaces where private buyers and sellers exchange carbon credits, each representing one ton of greenhouse gas avoided or removed. Credits are generated by diverse types of projects worldwide and verified by a wide range of independent organizations. Buyers purchase credits to offset their own emissions and meet voluntary targets or sell forward to other end “users” of carbon credits.
Most companies want to reduce their trade carbon credits footprints, and they can use carbon credits to offset their remaining emissions that they cannot eliminate through other means. Typically, a company will be allotted a specific number of carbon credits each year, which is the amount of their emissions that they can exceed without generating additional penalties (e.g., a cap-and-trade program). However, sometimes a company may produce more emissions than the amount of credits they are allotted, and it will need to buy and cancel some of its own credits from the market.
Unlike the regulatory market, which is set by emissions caps and other compliance rules at the national or state levels, the voluntary market serves individuals, businesses, and governments that choose to reduce their own greenhouse-gas emissions on a voluntary basis. This market is less regulated and more diverse than the regulatory market.
Can Carbon Credits Be Traded Internationally?
The London Stock Exchange, the world’s leading financial market, recently launched a new designation for funds and companies that invest in carbon removal or avoidance projects. The LSE’s Voluntary Carbon Market Initiative is intended to increase the flow of capital into carbon markets and encourage companies to invest in reducing their own emissions as well as those of their suppliers.
There are many challenges facing the voluntary carbon market, including insufficient liquidity, scarce financing and inadequate risk-management services. Additionally, the quality of carbon credits is often subpar, with inconsistent reporting and verification standards, and an inability to quantify the value of co-benefits such as community development and biodiversity conservation.
Governments can help drive unified standards and increased carbon-credit quality in the voluntary market. They can do so by participating in carbon markets and establishing core carbon principles and an attribute taxonomy. Liquid reference contracts based on those principles would consolidate trading activity around a few types of credits, promoting liquidity and providing daily price signals that allow corporations to efficiently identify supply trends. In addition, the governments’ involvement in these markets would facilitate the growth of supplier financing and supply chain integration.
This approach has worked well in Australia and Japan, where government involvement has consolidated the market around a single government-issued unit. This unit, called the ACCU and J-Credit, respectively, is traded in the futures markets of those countries. The broader issuance of a similar standard unit could serve as a blueprint for other governments looking to develop their own markets. Ultimately, a standardized carbon-credit system is critical for strengthening voluntary carbon markets so that they can support the world’s ambitious goals for climate action. Without it, the market will be unable to deliver on its promise of facilitating significant greenhouse-gas reductions.