Carbon Credit Securities
Carbon Credit
A carbon credit is a tradable certificate that represents one metric ton of greenhouse gas emissions reduced, avoided or removed through an emission mitigation project. This project must meet strict criteria imposed by government regulators or independent verification bodies to qualify for issuance of the credit. The carbon credit market is driven by a growing list of environmental and sustainable development goals and is expanding to meet the increasing demand.
A company may choose to purchase a carbon credit as a way of offsetting its own greenhouse gas (GHG) emissions. This practice is known as carbon offsetting or GHG offsets, and it is a crucial tool in reducing global emissions. The underlying principle is simple: if Company 1 emits more than its permitted limit, it can buy a carbon credit from Company 2 to make up the difference and stay within its GHG emission limits.
In markets that are subject to compliance, carbon.credit represent an emissions limit – or cap – that businesses must adhere to by purchasing and selling them in the compliance carbon market. If a management team is able to limit company emissions below its cap, it can sell the remaining carbon credits in the market and recoup some of its investment.
Carbon Credit Securities
Companies and individuals also can use carbon credit markets to purchase GHG emissions reductions from other parties. These are known as voluntary offsets and are sold through a variety of carbon credit market mechanisms. These can range from the Clean Development Mechanism to private carbon offset exchanges. While this is an effective means of offsetting a business’s own GHG emissions, it can be more expensive than buying and selling the credits in a compliance carbon market.
Today’s carbon market is a complex system of trading that requires sophisticated infrastructure, ranging from trade and post-trade services to advanced data and risk-management tools. It is also characterized by low liquidity and supply volatility. The main challenges for buyers and sellers are a lack of clear demand signals, the high cost of verifying new credits and the inability to sell them at economic prices.
As the market continues to evolve, it will be critical for market participants to develop and implement robust infrastructure. For example, resilient and scalable systems for listing and trading reference contracts, clearinghouses, meta-registries and advanced data infrastructure can help reduce costs and increase liquidity and transparency in the market. The development of these infrastructure components will support the growth of a functioning carbon market and enhance its overall integrity.
In addition, we must ensure that the price of carbon credits reflects the true social and environmental costs of emissions, which requires aligning pricing with the needs of buyers. In this respect, we are pleased to see that Gold Standard has recently begun advocating for a more holistic pricing approach by positioning carbon credits as an idiosyncratic asset class, rather than as a commodity, in order to unleash their full potential. This would enable them to play a more significant role in supporting corporate GHG emissions reduction commitments and contributing to a net-zero world.