How Can Carbon Credit Exchanges Be Traded?
Carbon credit markets are expanding rapidly, fueled by global efforts to reduce greenhouse-gas emissions. But despite this growth, few ways exist for individuals to invest in these credits. The good news is that the market is evolving to make it easier for investors to buy and sell these commodities. There are currently a couple of options for retail investors to invest in carbon credits, including exchange-traded funds (ETFs) and carbon credit futures.
ETFs are the easiest way for retail investors to invest in carbon credit exchange, and they work much like any other ETF. Investors can trade these products using an existing brokerage account or by opening a new one. In addition, many popular investment apps support ETF trading. Carbon-credit ETFs track the performance of the carbon market and offer a low-risk, straightforward investment option.
The underlying asset for carbon-credit ETFs is a portfolio of carbon-emissions reduction projects, called carbon offsets. These projects are designed to offset the emissions of specific companies or organizations. This helps to clean up the environment, while helping companies that are regulated by a carbon-reduction system to stay in compliance.
Several countries and states operate their own mandatory carbon markets, limiting the amount of CO2 a company can emit. When a company goes over the limit, it must purchase carbon credits from other companies to make up the difference. This is known as a cap-and-trade program. The programs vary, but in general they include a cap on total annual emissions and a tradable allowance for each ton of CO2 emitted. Currently, these systems exist in the European Union, California, and nine other states on the East Coast.
Aside from these compulsory carbon-reduction systems, there are also a number of voluntary carbon markets. These initiatives aren’t part of a compliance system, but rather offer the opportunity for businesses and individuals to reduce their emissions voluntarily. Voluntary carbon markets tend to be less standardized than compliance markets, and credits can often be bought and sold without any plans to use them for compliance purposes.
BCG’s latest research found that the integrity of carbon credit markets remains a critical concern. This is largely because of the lack of transparency in prices and the difficulty in verifying projects. A key step to improving this is establishing a digital process for projects and credits. This could lower issuance costs, accelerate payment terms and cash flow for project developers, and allow for traceability of carbon credits.
This is a critical issue for the overall success of the carbon credit market. As the market continues to grow, it’s vital that there are clear standards for buying and selling these carbon credits. This includes developing a set of core carbon principles, and an attribute taxonomy to ensure that credits meet quality thresholds. This will enable buyers and sellers to find the right matches more easily, and grow supply and demand.
