Carbon Credits Are Priced
A carbon price encourages households, businesses and governments to reduce their emissions by shifting the cost of pollution onto those polluting. It also enables governments to regulate and trade carbon-based gases, which are typically the most polluting greenhouse gas (GHG). In markets where companies pay for their own emissions, they can buy and “retire” credits from others who have made more efficient reductions than they can. These credits are called offsets and are traded on GHG trading systems, such as the European Union Emissions Trading System.
A common feature of these systems is that credits can be bought and sold on an open market and are subject to prices determined by supply and demand. But the ways in which carbon.credit are priced differs considerably between these systems.
The main reason is that the voluntary carbon market is so fragmented and complex that establishing how much a credit is worth can be daunting, even for experienced buyers and sellers. The market’s lack of transparency and pricing data, ad hoc accounting and verification processes, and a wide array of additional attributes that can be associated with carbon credits (such as community economic development, biodiversity protection and watershed restoration) create a wide range of prices, which makes it difficult for buyers to know whether they are paying fair value and suppliers to manage their risk.
How Carbon Credits Are Priced
One way to correct these issues would be to establish a standard set of features that all carbon credits should have. This could be done by implementing core carbon principles and a common taxonomy of attributes to classify credits. This would help ensure that all carbon credits meet quality criteria and represent genuine emissions reductions. It would also improve the matching of buyers and suppliers, lower issuance costs and payment terms for project developers, speed up issuance and cash flow to projects, and help verify that all credits are produced and used as intended.
Another way to improve the voluntary carbon market would be to consolidate trading activity around a few types of credits and promote liquidity on exchanges. This would make it easier for carbon-reduction producers to identify a buyer who is interested in their product and for investors to develop new sources of capital. It would also enable a more uniform pricing signal, which is essential to the growth of the market.
A third way to improve the carbon market is to create a digital process that can verify and issue credits at the point of origin. This would significantly improve the efficiency of the carbon market and reduce the risk of fraud. This would reduce issuance and registration fees for project developers, speed up issuance and payments to projects, allow credits to be traced, enhance the credibility of corporate claims related to offsets and reduce administrative burdens by allowing data to be collected more regularly. It could be accomplished by creating a central organization that hosts and curates a set of quality thresholds, along with a standard taxonomy of attributes, and by facilitating the creation of liquid reference contracts to support the price discovery process.
