Carbon Credit
There are many factors that affect the price of carbon credits. Whether you are buying or selling, the price you pay will depend on the underlying project and the market conditions. If the market for a specific project is strong, the value of the carbon credit will be high, whereas if the market is weak, the value of the carbon credit will be low.
The main objective of the carbon credit exchange market is to reduce greenhouse gas (GHG) emissions. To do so, it is necessary to establish rules of trade. Typically, the rules are governed by governmental organizations. These organizations ensure that the quotas are met at national and international levels. This is one way the carbon market helps finance shift toward clean energy production.
Carbon trading is a global market where businesses can purchase and sell carbon credits to offset their GHG emissions. Credits are issued to individuals or companies for avoiding a specified metric ton of CO2 from entering the atmosphere. Generally, the value of a carbon credit is determined by the volume of credits traded. For example, if the price of a carbon credit rises, more people will undertake environmentally friendly activities.
Carbon Credit Exchanges Commodities
However, the carbon market can be complex. While it is an industry that is emerging, it is not yet standardized. That means that there is a high risk of perverse incentives for low-quality projects. One seller may offer to offset the emissions of a factory by introducing a project in developing nations. But the company does not care about the quality of the carbon credits.
There are several types of carbon projects. Some are community-based. Community-based projects, usually managed by local groups, generate a larger share of co-benefits. As a result, they can trade at a premium to industrial projects.
Similarly, industrial projects can produce a large volume of credits. However, they also carry the risk of oversupply. A factory may decide that it is too costly to install a new machine and buy the carbon credits to offset the extra emissions.
Non-standardized products also allow end buyers to inspect the underlying projects. In addition, it is necessary to pay a fee for preventing double counting. Other factors that affect the price of credits include the volume of credits traded and the geography of the underlying project.
Many investors participate in the carbon market by buying shares in highly specialized funds. Some of the biggest early buyers of carbon credits included oil and gas majors, airlines and tech companies. However, more industries are joining the market as a means of hedging their financial risks related to the energy transition.
Several exchanges are emerging. One example is the IHS Markit Global Carbon Index, which tracks future contracts for carbon credits globally. Another is Platts, a company that collects data on the price of carbon credits. It has developed 20 price assessments that are used to calculate the value of the carbon market.
Another option is to enter into a voluntary carbon marketplace. However, these markets are not standardized and do not provide strong incentives for quality.