Trade Carbon Credits Good
Carbon trading is a complex area of finance and investing. There are a number of different ways for individuals to trade carbon credits, the simplest of which is to buy and sell exchange-traded funds (ETFs) that track the performance of these securities. Individuals can trade carbon ETFs through their existing brokerage accounts or use popular investment apps to get started.
A good carbon credit is one that is generated and certified under a regulatory framework that guarantees its authenticity, integrity and provenance. Most carbon credit transactions take place in the compliance market, where government regulators set a cap on how many tons of greenhouse gas emissions certain sectors (e.g. oil companies and power utilities) can release. Buying and selling carbon credits in the compliance market therefore requires a clear link between the credit’s underlying activity and its effect on GHG reduction. This clarity, coupled with the need from regulated end-users for these credits, creates trading liquidity.
Alternatively, there is the voluntary carbon market, which has recently surged in size due to a flurry of corporate net zero pledges and interest in meeting international climate goals, including the Paris Agreement goal of keeping global warming to 1.5 degrees Celsius above preindustrial levels. However, the market’s growth is cause for concern because the VCM is creating a system in which companies can delay meaningful action on their commitments by using carbon credits to ‘cancel out’ their emissions.
How Do I Trade Carbon Credits Good?
The VCM is also problematic because it provides cover for less scrupulous brokers and financial advisers to buy low-quality credits from project developers for next to nothing and then resell them as mainstream carbon investments that can be used for compliance in the regulated markets. The lack of market transparency and liquidity in these non-regulated markets provides fertile ground for this type of unscrupulous activity.
While it is true that some of these projects do reduce emissions, it is also important to note that many are not genuine reductions at all. For example, some VCM investors are buying credits from farmers who plant trees in order to earn money, but the tree planting would have occurred anyway due to a government conservation program. In addition, a growing number of investors are purchasing credits from projects that deforest areas that indigenous communities have lived in for centuries.
To solve these problems, industry stakeholders should develop a comprehensive voluntary standard that includes quality criteria for carbon projects, along with attributes such as the type of carbon project and geographic location, so buyers and sellers can match efficiently. This standardization of attributes will help ensure that the VCM is not used as a cover for the commodification of nature and the continued denial of global climate change. This is a task that requires participation by the world’s leading companies, investors, environmental organizations and standard-setting bodies. If all these groups work together, a well-functioning carbon market can be developed that allows for genuine emission reductions while supporting local economies and preserving biodiversity.