Carbon Credit Exchanges Are Priced
Putting a price on carbon credits is complicated. Whether you’re a business trying to reduce emissions or a developer financing and working on carbon reduction projects, you need to know what your buyers are willing to pay. And without a clear and transparent market mechanism, it’s hard to do.
The prevailing system is called the carbon credit exchange markets, and it’s designed to match supply and demand through trading of emissions allowances. These are the equivalent of pollution permits that companies need to stay within their permitted emissions cap. They can be bought and sold on a voluntary basis or backed by regulatory requirements.
Most of the carbon credits traded in these markets are based on voluntary agreements between individual businesses and governments, rather than being set by regulations. This type of market is known as the voluntary carbon market, and it’s where the bulk of the trading activity currently takes place.
How Carbon Credit Exchanges Are Priced
The current system for setting the prices of carbon credits is a complex affair, and there’s still a fair amount of opacity when it comes to how they are priced. A large part of this is due to the number of players involved in the carbon market. In addition to the traders and brokers, there are many intermediaries that often take a large margin (see recent articles in the FT and elsewhere).
There is also a great deal of variation in how carbon credits are priced depending on the type of project being developed. For example, the development costs of a cookstove project will be very different to that of a reforestation project. Therefore, the developers of these types of projects will be willing to sell their carbon credits at different break even levels. There is also a difference between carbon credits that are linked to removals of CO2 from the atmosphere, and those that are linked to avoidance of emissions. This is due to the structural undersupply of removal carbon credits, so that these are typically worth more on the market than avoidance carbon credits.
As more and more organizations look to move toward net-zero goals, the carbon credit market is set to continue to grow significantly. This is why it’s so important for us to make the process of linking supply and demand more transparent.
The goal is a more stable and liquid carbon market, where traders can buy and sell standardized carbon contracts. This will help to drive the prices of carbon credits to more closely reflect their value.
Ideally, this will help to incentivize the types of carbon reduction projects that will be most effective, while helping to ensure that those who are investing in carbon credits are getting a fair return on their investment. To do this, Gold Standard is calling for carbon credit prices to reflect the true value of natural capital, which includes things like a predictable climate and healthy ecosystems, as well as social metrics such as better health and gender equality.
