Qualifies For Trade Carbon Credits
Carbon credits are a way for businesses and individuals to offset their emissions by investing in projects that reduce greenhouse gas (GHG) pollution. These investments range from reforestation to tech-based emissions reduction projects. They’re a key part of the voluntary market, which has grown exponentially over the past year in response to corporate net-zero targets and international climate goals. The market is regulated by governments in some markets and also operates on a self-regulatory basis, with companies buying credits to meet their compliance obligations.
In a regulatory market, companies establish their emissions “cap” by disclosing their total GHG emissions and their plans to reduce them over time. They look to the carbon credit marketplace to buy credits that will help them stay below their cap, avoiding fines and additional taxes.
To ensure the quality of new credits entering the trade carbon credits marketplace, a system called CERs has been put in place to verify the project-level emission reductions. This system requires a high level of transparency and verification to protect the integrity of the carbon credit market and prevent fraud. However, a number of challenges remain, including long lead times to issue credits, low liquidity and a lack of access to financing. To address these issues, a digital process is needed to reduce costs and speed up the issuance and verification of credits.
What Qualifies For Trade Carbon Credits?
The price of a carbon credit is influenced by a variety of factors, such as the type of underlying project, the geography where it’s located, its vintage (the older the vintage the cheaper the credit), and its delivery time. In addition, if a project generates additional co-benefits — for example, improved welfare for local people or better water quality — these may be factored into the credit’s price, which is known as its “premium.”
Buyers of carbon credits typically work with brokers and retail traders to purchase and bundle credits into portfolios that they sell to end buyers. These buyers may then resell the credits at a profit or use them to meet their own GHG compliance requirements. As in other commodity markets, there are also exchanges, such as New York-based Xpansiv CBL and Singapore-based ACX, that aim to simplify the trading of carbon credits by creating standard products that guarantee some basic specifications.
In some cases, the rights to a particular carbon credit are transferred along with the land that it’s generated from or where it’s sequestered (for example, in forestry). This can raise concerns about chain of title and ownership, particularly when the property owner sells the trees or crops that have yielded the credits, as well as intellectual property issues if the technology is patentable. For this reason, it’s important for anyone working with carbon credits to consult a lawyer about potential legal issues. Ideally, this will occur at the beginning of the project and will be set out in the project’s ERPA. This will ensure that the rights to any future revenue streams are transferred properly to the appropriate parties.
