Trade Carbon Credits
The carbon credit market is a trading system in which companies or individuals can exchange credits for greenhouse gas emissions reduction projects. One tradable carbon credit represents one tonne of carbon dioxide or other greenhouse gas reduced, sequestered, or avoided. Carbon markets are designed to create a monetary incentive for companies to reduce their emissions, while allowing those who can’t easily do so to operate at a similar cost to their competitors.
In some regions, companies are required to trade in a government-regulated cap-and-trade carbon market. Companies are given a set number of emissions permits to emit during a certain period, and must buy or sell these permits when they exceed that limit. The idea is that this will encourage companies to find innovative ways to reduce their emissions. In other regions, trade carbon creditss are sold in voluntary carbon markets. The buyers are typically businesses or individuals seeking to meet internal standards for carbon footprint reduction.
While many of the same participants participate in both markets, their goals and motivations differ. Companies that must comply with a regulatory carbon market often seek to purchase as many credits as possible from a variety of sources, in order to maximize their compliance opportunity. Companies in a voluntary carbon market can choose to offset their emissions from any source, and many are seeking to reach net zero or even nullify all previous historical emissions.
Who Can Trade Carbon Credits?
Both of these markets have significant opportunities for growth, and a key factor to success is improving their integrity. Buyers need to be able to trust that they are purchasing high-quality credits, and sellers need to know that their sales will be well received. At the moment, there are a multitude of different verification methods and accounting practices in use, and the supply chain is fragmented. These challenges make it difficult for buyers to identify a credible supplier and for suppliers to manage the risk of their investments.
There are a number of environmental commodity exchanges and registries that list carbon credits for sale and facilitate transactions, but it can be challenging to obtain the information needed to evaluate their quality. Some carbon brokers develop their own projects in addition to offering the credits of others, and this can impact their ability to be impartial about project quality.
To improve the quality of the carbon credit market, McKinsey recommends establishing a reference contract structure that includes a core carbon principle and standard attributes to ensure that a transaction is valid. This could be supplemented with an advanced infrastructure for listing, trading, post-trade activities, and data availability. Resilient and scalable infrastructure will help reduce trade execution costs and increase the speed and reliability of carbon-reduction verification, and more sophisticated data management will help enhance market functionality. This will help to ensure that carbon markets can provide the vital emissions reduction incentives and signals necessary for the world to thrive.