The carbon credit market is where companies buy and sell credits to offset their emissions and meet their corporate social responsibility, branding and marketing goals. In the regulated markets, companies face fines and extra taxes for going over their limits on greenhouse gases like carbon dioxide. To avoid those penalties, they look to the carbon market for help by purchasing credits from projects that reduce their overall emissions, also known as “offsets.” The good news is that some of these offsets do truly save carbon; the bad news is that many do not.
The carbon credit market got its start in 1997 when 198 nations signed the Kyoto Protocol, an international treaty that aimed to cap and reduce human-generated greenhouse gasses. In the decade that followed, the United States, the European Union and other nations developed their own versions of cap-and-trade emissions trading systems.
These markets allow businesses in carbon-heavy industries like automaking, oil and gas exploration, space travel and manufacturing to purchase credits from (and thus fund) environmentally friendly projects like reforestation initiatives, carbon sequestration developments and renewable energy ventures. They then use those credits to offset their own emissions or sell them to other companies that need to reduce theirs.
In addition, environmental groups like The Nature Conservancy and others can generate money by selling carbon credits connected to things like arranging conservation easements that prevent future pollution of protected land. But the nascent industry has been plagued by wishful thinking, fraud and even outright scams. Some critics claim that more than 60 percent of the credits currently on the market are from projects with questionable “additionality” claims, including old wind and other renewable energy facilities.
Traders and financial players looking to take part in the booming carbon market have sought to simplify the process by setting up exchanges that offer standard products. These products, like the Xpansiv CBL carbon credits and ACX global nature tokens, offer guarantees that credits have certain basic characteristics. The goal is to make the trade process faster and easier, with end buyers able to quickly see which credits are of high quality.
But the standardization may be backfiring. While it makes it faster and easier for traders to trade carbon credits, these standardized products can obscure the fact that many credits do not offer actual reductions in emissions. According to a new report by Trove Research, a U.K.-based climate change consultancy, only 2 percent of past CDM projects have been proven to actually benefit the atmosphere.
While the market for carbon credits is complex and still in its early stages, BNEF expects it to continue to grow as more countries and businesses set net zero targets and as investors demand that they be exposed to these risks. In its high-quality scenario, BNEF forecasts that prices will be low in the near term but begin to rise rapidly as milestone years for net zero goals approach. This will drive more investors to seek out carbon credits with real benefits to the planet.