Invest in Carbon Credit Exchanges
A carbon credit exchange is an online marketplace where individuals, companies, and organizations can buy or sell credits that represent verified reductions in greenhouse gas emissions. The market for these credits is growing quickly as businesses and other buyers seek to meet their own net-zero or net-negative emission goals, as well as offset any additional emissions that they cannot eliminate with energy sources or operating practices already in place.
A large, effective voluntary carbon credit exchange market would enable these buyers to locate reliable suppliers of credits and complete the transactions required for them to meet their emission reduction goals. To do this, the carbon market needs to be able to connect buyers and sellers through an easy-to-use online platform that is transparent and verifiable.
The market for carbon credits is a global one, facilitated by trading platforms in Europe, Asia, and the US. There are also many individual brokers and other intermediaries that work with carbon credits. These platforms allow individuals and companies to purchase carbon credits in much the same way that they might buy stock options or other commodities futures contracts. There are even ETFs that track carbon-credit futures, such as KraneShares Global Carbon Strategy ETF (KRBN).
Why Should I Invest in Carbon Credit Exchanges?
Typically, companies that purchase carbon credits do so to help them reach their corporate climate goals. This might include tech companies like Apple or Google, airlines, or oil and gas majors. More recently, other industry sectors, including finance, have begun to get involved as they set their own net-zero or carbon-neutral targets or simply seek a hedge against the financial risks of the energy transition.
Carbon credits are often purchased in conjunction with a government-led emissions trading program known as a cap-and-trade system. Under this model, regulators set a limit on carbon emissions and then auction off permits to businesses to emit a certain amount of carbon each year. Businesses that exceed the limit must buy carbon credits from those that did not.
The price of a carbon credit is determined by various factors, including the type of project that generated it. Credits issued by community-based projects, which are designed and operated by local groups or NGOs, tend to trade at a premium over those from industrial projects. This is because these projects often generate other co-benefits that contribute to the UN’s Sustainable Development Goals, such as improved water quality or reduced economic inequality.
A large, effective voluntary carbon market could facilitate the flow of capital to these types of projects and accelerate the progress toward meeting net-zero and net-negative emission goals. This is why the Institute for International Finance has created a private-sector Taskforce on Scaling Voluntary Carbon Markets. The taskforce is working to create a blueprint for building a carbon market that is unprecedented in size and scope while ensuring that it is robust, transparent, and verifiable. For more information, visit the IIF’s Taskforce page.