Trade in Carbon Credits Start
Carbon credits are a key instrument in reducing greenhouse gas emissions. The voluntary market for these tradable instruments is set to reach $6.7 billion in 2021, according to Ecosystem Marketplace. It is booming because of corporate net-zero goals and the Paris Agreement’s goal of limiting global warming to 1.5 degrees Celsius above preindustrial levels. The voluntary market is also growing because of increased implementation of Article 6 of the Paris Agreement.
The first trade carbon credits was created in 1989 by a company called Applied Energy Services, which paid farmers to convert fields into forests and sell the resulting carbon credits to power companies to offset their own carbon emissions. The idea was that the trees would absorb CO2 and emit oxygen, creating a carbon-negative effect.
This was the first time that a company used carbon credits to meet its emissions-reduction obligations under an international environmental treaty. The concept has since been taken up by a number of companies and governments around the world.
When Did Trade in Carbon Credits Start?
Traders and financial players buy and sell the carbon credits in order to offset their own emissions. They can be obtained from projects that remove emissions directly, such as reforestation or energy-efficient building, or reduce them indirectly by avoiding emissions, for example, by investing in wind farms or replacing coal plants with natural gas. There is also a risk involved in purchasing carbon credits. They may not be as reliable as direct reductions or purchases from projects that are genuinely carbon neutral.
While many players in the carbon market are trying to help reduce emissions, it is important for regulators to ensure that this is happening. One way to do this is to create a compliance market that forces companies to trade with each other to meet their emissions-reduction obligations. Many countries and regional organizations have implemented these markets, such as the European Union’s Emissions Trading System (ETS) and the nine states that are part of the Regional Greenhouse Gas Initiative.
The ETS and other compliance markets are designed to work on a “cap-and-trade” principle, where regulated businesses (or in the case of some regions, entire countries) are issued permits or allowances that add up to a maximum cap on their emissions. Those who cannot reduce their emissions themselves must purchase permits from others, and the underlying assets in these markets can be traded amongst these regulated entities, as well as with the public at large through the ETS’s online platform.
A less-developed form of carbon trading is the voluntary market, in which businesses and individuals can trade their own carbon credits to meet their emissions-reduction obligations. The voluntary market is more complex than the compliance market and has a higher degree of variation in price because of the multitude of attributes that can be associated with a carbon credit, such as its underlying project and location.
Standardized products on exchanges are favored by end buyers who want to be assured that the carbon credits they are buying and selling are not just any old credit. For instance, the exchanges Xpansiv CBL and ACX have set up standard products, such as the Nature-based Global Emissions Offset (N-GEO) and the Global Nature Token, which guarantee some basic specifications for credits that are labelled with these names.
