Trade Carbon Credits
If you’re a business or individual looking to reduce your carbon footprint, buying or selling credits can be an excellent way to do so. However, it’s important to know how exactly these transactions work. This is because the carbon market can be complex, and prices can fluctuate wildly based on numerous factors.
Buying and selling carbon credits is usually a process conducted through a third-party broker. These brokers will offer a variety of carbon credit types and can help buyers or sellers negotiate prices that reflect the true value of a particular project. The most common type of carbon credit is the emissions reduction credits that are issued under a cap-and-trade program. Under this system, regulators set a limit on the amount of carbon that can be emitted and then issue credits to companies when they exceed that limit. These companies can then trade those excess credits to other companies that need them.
These trade carbon credits programs can also be run at the state level, with many states having forest stewardship programs that pay farmers to plant trees or take other conservation measures in exchange for carbon offsets. Many of these programs have carbon thresholds to determine who can participate, and it is important to understand these limitations before purchasing or selling carbon credits. In addition, these programs are not all created equal. Some are more transparent and rigorous than others in determining whether or not a credit is legitimate.
How Do You Trade Carbon Credits?
There are also many environmental commodity exchanges in North America and Europe that list carbon credits for sale, and they typically work with registries to enable these transactions. Purchasing carbon credits through these markets can be a quick and easy process, but it is crucial that buyers do their homework to ensure that they are purchasing high-integrity credits. For example, the carbon credit must be “additional,” meaning that it represents emission reductions above and beyond what would have occurred in a business-as-usual scenario. It must also be permanent and have a “leakage” rate of less than 5%, which ensures that the emissions reductions are not simply shifting from one place to another.
A final option is to purchase or sell carbon credits through an exchange-traded fund (ETF). These funds are designed to track the performance of underlying assets, such as carbon-credit futures contracts. They can be traded through many popular investment apps and are a good option for individuals who don’t want to buy or sell individual carbon-credit projects.
To streamline the trading process, some exchanges are creating standard products for carbon credits. For example, Xpansiv CBL and ACX have both developed a label for nature-based emissions reductions called the “N-GEO” and the “Global Nature Token.” Credits sold under these products are guaranteed to meet certain criteria, including a specific type of underlying project, a fairly recent vintage, and a certification from a restricted group of standards. This can make it easier for end buyers to find the credits they need and protect themselves from accusations of greenwashing.