A growing number of individuals and companies buy carbon credits on a voluntary basis to offset their greenhouse gas emissions. This may be in the interests of gaining a competitive advantage through a certificate of carbon neutrality (for example in tenders, sales or reputation), or as part of their own broader environmental stewardship goals.
While the global economy is rapidly shifting to low-carbon, some nations are regulating their carbon market as a way of encouraging companies to invest in emission reduction technologies and limiting their own overall pollution levels. The EU Emissions Trading System is a key example, and is likely to set the tone for future regulation worldwide.
The EU ETS is the world’s largest trade carbon credits market and a cornerstone of EU climate policy. The scheme establishes a limit or ‘cap’ on carbon dioxide and other greenhouse gas emissions from power, industry and aviation, making it more expensive to pollute beyond that cap. Companies that emit above their assigned allowances must surrender those extra allowances to the market, or face heavy fines. Trading in the allowances drives prices up and helps incentivize innovation and investments in emissions reduction technology.
How to Trade EU Carbon Credits
As with most other commodities, carbon market participants trade in a variety of ways. Most transactions take place through brokers and retail traders, who buy large numbers of credits from the suppliers and bundle them into portfolios that are sold to end buyers with some form of commission. These players can be found all over the world. For example, New York based Xpansiv CBL and Singapore based AirCarbon Exchange (ACX) both have established carbon markets.
One tradable credit equals one tonne of CO2 emissions reduced, sequestered or avoided. The price of a credit is determined by a number of factors. One is the vintage, which refers to the year the emission reduction took place; older credits are generally less valuable. The quality of the project and the standard under which it was certified are also important. A credit can also be worth more if it generates additional ‘co-benefits’ that go beyond the GHG emission reduction, such as jobs created in local communities or increased biodiversity.
Platts collects bids, offers and trades on the brokered market for credit in all of these categories and also on a range of different emissions reduction projects. Our carbon pricing assessments are based on our analysis of bids, offers and trades in the brokered market, and also on our price indications collected from the market via our pricing platforms.
The most valuable credits come from reforestation and other carbon capture and storage (CCS) projects. These are generally the most cost effective at reducing emissions but also require substantial investment. Other types of credits, such as those from technology-based projects or emissions reduction at source, are typically the most expensive. This is largely due to the need for significant capital investment and operating expenditures associated with these type of projects. However, as these types of technology become more widely available and affordable, their price is expected to drop.