Individuals Trade Carbon Credit Exchanges

Carbon credits are used to offset a company’s emissions by trading with other entities in the market that have been working on carbon reduction projects. They can be traded on traditional carbon exchanges or as tokens enabled by blockchain technology. Either way, they’re a hot commodity in the world of environmental commodities.

Individuals aren’t permitted to buy or sell carbon credit exchange directly. However, they can purchase exchange-traded funds (ETFs), which are traded on the stock markets and backed by a portfolio of carbon-reducing assets. ETFs are the simplest way for retail investors to participate in the carbon market.

There are two types of carbon markets: those that must adhere to compliance systems and those that operate on a voluntary basis. Compliance systems are based on laws mandating emissions cuts and establish maximum emission limits for companies, sometimes called allowances. In the case of the EU Emissions Trading Scheme, or EU ETS, polluters must trade their excess allowances on the market in order to stay under their cap.

Voluntary carbon markets, on the other hand, operate outside of compliance systems and allow businesses to purchase credits without having any intention of using them for compliance purposes. These are often seen as more valuable to potential buyers because they help to meet the UN’s Sustainable Development Goals, and also because they often generate additional co-benefits beyond greenhouse gas emission reductions.

Can Individuals Trade Carbon Credit Exchanges?

These markets can be complicated, though, because of the many different attributes that influence carbon credit prices. For example, some credits are labelled as “removal” credits which refers to the action of removing carbon from the atmosphere through projects like reforestation or afforestation, while others are tagged as “avoidance” credit which simply means that the project has avoided emissions through actions such as switching off power plants. Prices for both are influenced by the volume of credits that are being traded at any one time, the location and geography of the underlying project, its vintage – the older the credits the lower their price, typically – and whether they have been certified by a specific standard.

In an effort to increase the liquidity of the voluntary market, exchanges are experimenting with ways to simplify and speed up carbon trading by establishing standard products for the sector. Xpansiv CBL and ACX have both set up these standards, which guarantee that certain basic specifications are respected. Credits labelled with these products must, for example, come from high-quality projects and have a relatively recent vintage.

Despite these efforts, however, there are still obstacles to making the carbon market more accessible. Some of these include insufficient liquidity, scarce financing and inadequate risk-management services. Additionally, it can be difficult to obtain the information needed to evaluate quality when buying or selling carbon credits because of the variety of accounting and verification methods employed by project developers and the lack of standard products for these. Lastly, the supply of credits is constrained by long lead times for verification and certification and by the fact that a significant number of projects are developed and managed by community groups or NGOs, which makes it more expensive to certify them.