June 15, 2024

Buying and selling carbon credits is the way companies offset their greenhouse gas emissions. One credit is equal to the amount of carbon dioxide reduced, sequestered or avoided through a project that is verified by a credible standards organization. The market for these credits, known as a carbon market, is growing.

Some companies are committed to reaching net-zero emissions, reducing their emissions as much as possible, so they can remove the equivalent amount of carbon from the atmosphere as they put in. However, these companies may not be able to eliminate their emissions completely or as quickly as they would like, so they purchase credits from projects that are already reducing greenhouse gases. These projects may be in the form of reforestation, bioenergy or renewable energy generation.

The purchase of these credits allows a business to say that it has reduced its environmental impact, and the credit holder is then free to do other activities that reduce emissions. This is called carbon trading, and it helps businesses comply with both mandatory and voluntary emissions regulations.

A carbon credit exchange is the platform that links supply and demand in this market, allowing participants to buy or sell carbon credits. It’s broken down into two submarkets – the regulated market, which must adhere to rules and policies set by the relevant authority, and the voluntary market. In the regulated market, carbon traders must obtain and hold a permit from the authority to trade carbon, or else they will face fines and other penalties. These traders buy and sell the permits in a carbon market, which determines the price of the credit.

In the voluntary market, the underlying asset is not a permit but an individual credit. These credits are backed by a project that is independently certified as meeting certain requirements, which includes quantifying ecosystem services, demonstrating good governance and measuring performance annually. These projects are referred to as certified emission reduction (CER) or carbon neutrality (CNN) projects.

The voluntary market is driven by demand from organizations looking to offset their own carbon footprints, and also to meet the UN Sustainable Development Goals. Recently, this market has accelerated significantly, driven by corporate net-zero goals and the global agreement at COP26 to limit warming to 1.5°C above preindustrial levels.

It is important to understand the different types of carbon markets and the regulatory environment in which they operate before exploring a carbon credit project. A trusted source of independent information is essential to avoid pie-in-the-sky projections often offered by private entities pitching new projects.

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