Carbon Credit Exchanges Are Calculated and Determined
Companies that produce large amounts of greenhouse gases, such as oil refineries, are required to buy carbon credits to offset their emissions. These credits are then used to finance projects that reduce the amount of CO2 in the atmosphere. These credits are also sometimes called carbon offsets and are traded on an emissions trading system, or cap-and-trade program, like the EU ETS or the US Climate Mitigation Initiative. These are regulated by laws and regulations that are set by governments around the world.
A key part of how carbon credit exchange are determined is by examining the underlying project. The type of project, its location and vintage, as well as how it helps to meet some of the United Nations’ Sustainable Development Goals (SDGs) all influence the price of carbon credits. The quality of these underlying projects is also important. Generally, they must meet at least one of three criteria: exclusive claim, additionality and permanence.
Currently, many NGOs and standards organizations certify these types of projects to make sure they are following their stated objectives and producing a certain volume of emissions. These organizations often have a series of methodologies, or requirements, that a project must follow when calculating the number of carbon credits produced.
How Carbon Credit Exchanges Are Calculated and Determined
A common taxonomy would help both buyers and sellers match credits to their needs. This would simplify the market and create a more efficient way for trading to take place. It could also promote liquidity on exchanges, reducing trading volumes that don’t generate reliable daily price signals.
The market for carbon credits is a voluntary market that is accelerating because of the rise in corporate net-zero goals and interest in meeting international climate targets set by the Paris Agreement. The accelerated market reflects a global shift to clean technologies, the accelerating impact of climate change and a growing awareness among the private sector of the value of natural capital: a stable climate, a prosperous ecosystem, etc.
There are five main players in the carbon market: retailers (traders), brokers, standards, project developers and end buyers. Retailers buy credits from project developers who have made the effort to measure, report and verify the emissions emitted by their projects over a period of time. They then sell them to end buyers who are committing to offset their own GHG emissions.
Standards: these are NGOs or other non-governmental organizations that certify that a certain project meets a specific set of criteria and has the potential to reduce a specified volume of CO2 over a specific time. Typically, standards require that projects produce enough carbon credits to cover the reductions they made over time and that they provide additional co-benefits in line with the UN’s Sustainable Development Goals.
The value of a credit can vary significantly depending on its geography, its vintage, its delivery time and whether the underlying project also generates additional ‘co-benefits’ to help meet some of the UN’s Sustainable Development Goals. For example, community-based projects can generate more additional co-benefits and therefore trade at a premium to other types of projects.
