Carbon trading has become a popular way for businesses to comply with both voluntary and mandated emissions regulations. Essentially, companies that emit more than they should are required to offset the extra by purchasing credits from companies that produce less than their target amount of greenhouse gas (GHG) emissions.
However, obtaining and selling these credits is not always simple or straightforward. There are a number of factors that affect their prices, such as geography, the type of underlying project, the vintage of the credits and their delivery time. Moreover, there are many different standards for certifying carbon.credit exchange projects and this complexity makes it difficult to determine the validity of an offset.
Hence, a lot of effort and time is often spent to ensure that the credits that are traded are as valid as possible. This is especially the case with nature-based credits, which can be harder to verify than those produced by industrial projects. There are a few ways to improve the reliability of carbon credits and increase their value. One solution is to establish quality criteria for the credits themselves, and to classify their attributes based on these. This would help to standardize the market and enable buyers and sellers to find credits that are compatible with their needs.
Another way to improve the reliability of credits is to set up a common verification process for all projects. This would make it easier to trace the emissions that are being offset and also allow for a more accurate verification of the actual GHG reductions achieved by the projects.
This would help reduce issuance costs, shorten payment terms and speed up remittances for the projects that are producing the credits. It would also lower risk for borrowers, reduce the likelihood of fraud and make it more likely that corporate claims about using offsets are credible.
It is also important to ensure that the verification process of credits meets the highest levels of integrity, transparency and market fairness. This can be done by establishing core carbon principles and a taxonomy of additional attributes to classify them, such as the underlying project type or the UN’s Sustainable Development Goals (SDGs).
These criteria should include quality thresholds and a system for matching credits and potential investors. The resulting system could then be used to price carbon credits in over-the-counter trades.
There are a few different types of carbon markets that are emerging worldwide: cap-and-trade systems, foundation and credit systems and voluntary carbon markets. In the compliance market, there are cap-and-trade systems that limit the quantity of emissions that can be released from certain sectors — oil, transportation, energy and waste management – to a specific amount. These markets work like a stock market where participants bid for or get free emissions permits with an emission reduction goal in mind.
In the foundation and credit system, there are also a variety of options for organizations that are not subject to the cap-and-trade regulations to purchase credits from other businesses with the goal of reducing their overall GHG emissions. The credits can be held, sold or retired and the organization can use these to offset their own emissions.
