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Can Anyone Trade Carbon Credits?

Trade Carbon Credits

Carbon credits are marketable permits that reflect one metric ton of carbon dioxide (or other greenhouse gases) emissions. Companies that directly reduce their own emissions, and thereby earn credits, are often in a position to sell those credits to companies that need them as a way of staying below their permitted emission levels. As the climate crisis intensifies, demand for these credits has been growing. This has spurred the creation of several new investment vehicles like carbon credit ETFs. But can anyone trade these securities and does trading carbon credits really reduce global environmental pollution?

Despite recent technology advances, some companies are still years away from significantly cutting down their carbon footprint. When management teams are unable to keep company emissions below their permit levels, they look towards the carbon market for ways to offset their over-emissions. In the regulatory (or compliance) market for carbon credits, buyers and sellers are matched through a system of quality thresholds and additional attributes that describe the credit in more detail. Establishing a common set of standards for these attributes could make the process of matching buyers and suppliers more efficient.

A trade carbon credits can be created by a wide range of projects that either directly or indirectly reduce, avoid or capture greenhouse gas emissions. Most are made through agricultural or forestry activities, although they can also be generated by energy efficiency projects or waste reduction initiatives. Companies seeking to offset their own emissions buy these credits from a middleman or directly from the producers themselves. For example, when a forester plants trees to offset the emissions produced by an oil and gas company in its operations, the landowner receives money; the company pays to offset their emissions; and the middleman makes a profit along the way.

Can Anyone Trade Carbon Credits?

The voluntary carbon market is expanding rapidly, largely driven by corporate net-zero goals and interest in meeting the international climate action goals in the Paris Agreement to limit global warming to 1.5 degrees Celsius above preindustrial levels. It also offers individuals a convenient way to demonstrate their environmental awareness and to help fight climate change.

As the climate crisis intensifies, it is clear that we must move to reduce carbon emissions and decarbonise economies in a hurry. But the required investments will be far greater than those currently available. It is estimated that developing countries will need to mobilize US$6 trillion by 2030 to meet their climate action goals (known as Nationally Determined Contributions, or NDCs).

We believe that a combination of both regulatory and voluntary markets can play an important role in driving the necessary transformation. A key element in this will be increased and sustained funding for low-carbon development. To ensure this happens, we need to focus our attention on supporting and scaling low-carbon investment platforms – both the projects themselves and the finance markets that connect them with investors. This will require governments and other funders to increase the scale, consistency and transparency of their investments.