Trade Carbon Credits

One of the most popular investments in recent years is carbon credits. As governments take climate change seriously and businesses make more and more ambitious pledges to go carbon neutral, interest in this market is booming. But how exactly do you trade carbon credits? And what are they, anyway?

A carbon credit is a tradable certificate that represents one metric ton of reduced, avoided, or destroyed greenhouse gas emissions. It can be created by anyone who reduces, avoids, or destroys carbon dioxide or other greenhouse gases through agricultural or forestry practices, or by using energy efficiency, waste management, or clean energy technologies. The person or company that creates the trade carbon credits can then sell it to another party who needs to offset their own emissions. A middleman can also earn money by facilitating these transactions. The money that is paid for a carbon credit can be invested back into the project that created it or used for other purposes, such as improving farmland or donating to charitable causes.

There are two types of carbon markets: the compliance market and the voluntary market. Under the compliance market, a government sets a cap on how much carbon certain sectors of the economy can emit and companies are issued emissions permits (also known as allowances) that they can trade with each other. If a company exceeds its emissions cap, it must either pay a fine or purchase credits to cover its excess emissions from the voluntary market.

How Do I Trade Carbon Credits?

The voluntary market is driven by companies’ avowed ambitions to achieve net-zero emissions and the need for the global community to meet international greenhouse gas reduction goals set in the Paris Agreement. Investors in the market can buy carbon credits directly from projects that are already capturing greenhouse gases, or through brokers that have the project-level capacity to verify and validate them. The price of a carbon credit is influenced by the type of project that generated it, the volume of credits traded at any given time (the more available the lower the price), the geography and vintage of the credits, the delivery date and other factors.

For example, a carbon credit from a reforestation project may be worth more to buyers because the tree-planting is likely something that would have happened otherwise. In addition, if the carbon project is verified by a third-party standard, such as Verra, it can be marketed at a premium to potential buyers. Platts collects bid, offer and trade data on carbon credits that are certified by these standards in order to produce 20 different price assessments of the credit.