How Do Carbon Credits Get Traded on a Carbon Credit Exchange?

Carbon Credits Get Traded on a Carbon Credit Exchange

Buying carbon credits allows companies to offset their greenhouse gas emissions, helping them meet their corporate net-zero goals. Carbon credit markets are the trading systems in which these credits get traded. Typically, these are global or regional systems that use the cap-and-trade model. Some are regulated, and others are voluntary. The rapid growth of the voluntary market this year reflects corporate interest in meeting international climate goals agreed to in the Paris Agreement.

There are many ways to purchase and sell carbon credits on a carbon credit exchange. The method you choose depends on your goals and how hands-on you want to be. One option is to contract directly with a carbon crediting project for the credits it will generate. This approach requires deep engagement with a project, but can lead to lower costs than purchasing credits on an exchange or through a retailer. Some retailers develop their own portfolio of projects, and buyers should carefully review purchases from these sources. In some cases, retailers may sell credits that they have already retired. This can raise issues around sustainability and reliability.

When you buy credits, they are usually labelled with a specific type of crediting program and a unique identity code. The label indicates a set of specifications and requirements that the credits must meet to be eligible for purchase and retirement under the program. The standards that apply can be very strict, and can include requirements for permanence, verification, and forestry management. Credits that meet these requirements are known as certified emission reduction (CER) credits.

How Do Carbon Credits Get Traded on a Carbon Credit Exchange?

A carbon credit is a claim to one tonne of CO2 or other greenhouse gases reduced, sequestered, or avoided. Once a credit is claimed, it becomes an offset and moves to a register for retired credits, or retirements. Upon retirement, the credit no longer can be traded or used to demonstrate compliance with emissions targets.

Carbon credits are issued and monitored by governments in a number of countries. They allow businesses to emit a certain amount of GHGs before needing to purchase credits to stay below their limits. Those who have excess credits can sell them on the carbon credit exchange. The concept is similar to the way in which pollution allowances, or permits, are traded.

There are a number of environmental commodity exchanges – mostly in North America and Europe – that list carbon credits for sale and work with registries to enable transactions. Purchasing from an exchange can be fast and easy, but it is difficult to obtain the information necessary to evaluate the quality of these credits. Some of these exchanges are part of national or regional programs, such as the European Union Emissions Trading System (EU-ETS) and the California Cap-and-Trade program. Other exchanges are managed by independent, nongovernmental organizations, such as Gold Standard and Verra. These exchanges offer a variety of products and are generally more complex to use than those offered by the global, centralized carbon crediting systems.