By Generates Trade Carbon Credits
Carbon credits are units of measurement that represent one metric ton of reduced, avoided or removed greenhouse gas emissions. They are tradable in two markets: one is the compliance market, where companies trade with each other to stay below their own emissions limits set by regulators; and the other is the voluntary market, where companies choose to buy carbon credits to offset their own emission levels.
The upstream part of the carbon credit market is made up of project developers, which are the businesses that set up the projects issuing the credits. These can range from large-scale industrial projects like a hydro plant to smaller community-based ones like clean cookstoves.
A credit’s price depends on many factors, but the type of underlying project is the biggest one. trade carbon credits from projects that generate additional co-benefits and meet the UN’s Sustainable Development Goals (SDGs), such as improving welfare for local populations or better water quality, tend to trade at a premium over other types of credits.
Who Generates Trade Carbon Credits?
Once a project is established, the next step is to find a buyer for the credits it produces. There are a number of different players that can help with this, including broker and investor firms, but the most common buyers are companies that want to purchase them in order to offset their own emissions. This is a growing segment of the carbon market.
There are also organizations that can help with putting a price on carbon credits, which is the first step in making them more tradable. The World Bank’s Invest4Climate program, for example, supports countries in developing the institutions needed to put a price on carbon and make their projects tradable in both the compliance and voluntary carbon markets.
Putting a price on carbon is no easy task. One of the most challenging elements is creating a clear signal that reflects the true value of a credit. This can be a complex process due to the huge variety of credits available and the number of factors that affect their price.
The other major challenge is the technical and financial infrastructure needed to support carbon credit trading. A resilient and scalable carbon market needs to include clearinghouses, meta-registries, supply chain financing and advanced data infrastructure. These will facilitate the listing, issuance and trading of reference contracts, and support post-trade activities and risk management. They will also increase the transparency and integrity of the marketplace and provide incentives for participants to keep up their efforts.