Carbon credits are a relatively new concept in the financial world. They are a way to mitigate the effects of greenhouse gas emissions by purchasing a “right” to emit carbon dioxide. However, the actual use of the technology and the market itself have not yet fully developed.
A credit can be issued by an organization to offset an individual’s or a company’s emissions. An organization may also retain the credits it has received. For example, an airline may choose to offset its emissions by donating money to an environmental initiative.
Carbon credits are typically traded on a voluntary carbon.credit market. This market is also unregulated. In fact, it is largely based on unverifiable claims about projects that can reduce emissions. There is a lot of interest in carbon trading, but it is unclear how the market works. It is possible that in the future, carbon credits may be marketed to private investors in a centralized marketplace. The infrastructure to support this system needs to be able to handle increasing demand.
A credit’s worth is measured in terms of how much CO2 it can offset. The standard benchmark is one metric ton of CO2 for each credit. Other types of carbon credits are offered, based on the attributes of the underlying project.
As of 2019, 1.3 billion metric tons of carbon dioxide equivalent were produced by the voluntary carbon market. That number is expected to grow significantly. Some of the biggest names in the industry are making net-zero commitments to their carbon emissions, such as Amazon and BP. Even though they aren’t currently legally obligated to do so, some companies are going to have to spend hundreds of millions of dollars to offset their emissions.
As more companies look to offset their carbon emissions, they are investing in the market. One example is KraneShares Global Carbon Strategy ETF. This is an exchange traded fund that tracks a portfolio of carbon allowance futures contracts. Since the ETF is mainly concentrated in European Union-approved emission trading systems (EUAs), it provides wider access to carbon credit compliance markets.
The carbon finance model involves a yearly payment to a project partner for reducing emissions. Each project has a unique set of attributes, such as a project site or location. These attributes are valued by different buyers, which affects the price of a credit.
As a result, there are a number of potential regulatory questions and risks. Whether or not a credit can actually mitigate the effects of climate change depends on several factors. Companies with carbon offset strategies should be aware of these potential risks and keep an eye on how the market is progressing.
The Securities Exchange Commission (SEC) is the governing body for securities in the U.S. Although the SEC does not directly regulate the carbon credit market, the agency does enforce securities rules. If there is any confusion or misunderstanding, it can be clarified through the help of a qualified professional.