Carbon Credits Be Sold

A carbon credit represents a reduction of one metric ton of greenhouse gases that can be used by a company or individual to offset emissions elsewhere. These credits are verified, tradable and retired once they have been used to offset a particular amount of emissions. While many people have a negative view of the carbon market, it can play an important role in helping countries and companies meet their climate goals.

The main players in a carbon marketplace are brokers and traders, just like other commodity markets. Retail traders typically purchase large portfolios of carbon.credit from several sources and bundle them into packages that are sold to end buyers, usually with some commission. There are also exchanges such as New York based Xpansiv CBL and Singapore based AirCarbon Exchange (ACX), though most carbon credit trades still occur in private conversations or over-the-counter.

Unlike the commodity markets where you may be familiar with trading, the carbon market is much more complex. The global climate change community has a number of different standards and protocols that are in place to ensure transparency, integrity and environmental robustness. These include the Clean Development Mechanism, a UN initiative that lays out practical mechanisms for trading carbon internationally, as well as the Paris Agreement.

How Can Carbon Credits Be Sold?

To produce carbon credits, a project must reduce or remove GHGs from the atmosphere and be independently verified by a third party. Some projects can even generate additional social and economic ‘co-benefits’ in line with the UN Sustainable Development Goals. For example, a forest project that prevents clearing will create more trees which in turn absorb more carbon from the atmosphere, while regenerative agriculture can sequester more CO2 from the soil than traditional farming.

Projects that avoid or reduce GHGs from the atmosphere are called abatement projects, and they make up most of the current carbon market. They include anything from reducing methane emissions from livestock to capturing CO2 in soils or avoiding deforestation. A carbon credit from an abatement project can only be claimed once and is moved to the register of retired credits after it has been used to offset a specific amount of GHGs.

There is another type of carbon project, known as a removal project, that captures or removes carbon from the atmosphere. This can be nature-based, such as reforestation or afforestation or through wetland management, or technology-based, including direct air capture and carbon capture and storage. Generally speaking, removal projects are more expensive than avoidance projects.

While the market has struggled to grow in part due to fraud and other issues, there is increasing demand for carbon offsets from a variety of industries. These buyers are often companies or individuals that have set net-zero emissions targets or wish to offset their existing emissions with projects that will reduce them further. This trend has led to more and more investors stepping into the market. Some of them are buying directly from the project developers themselves, a practice that is known as ‘frontier investing’.