Carbon Credits Are Priced
Whether you want to buy carbon credits to offset your own emissions or to help support the development of low-carbon projects, it is important to understand how they are priced. Prices vary depending on many factors, from the country or government body where the credit is issued to the type of underlying project and verifications.
The voluntary market for carbon.credit is a supply and demand market with a wide range of participants including private individuals, corporations with corporate sustainability targets, and NGOs. The market also includes governments and developers that create emission reduction and removal projects certified by carbon standards that meet specific goals.
Voluntary pricing of carbon is typically done via cap-and-trade systems, whereby entities with emissions below a certain threshold are required to purchase and sell carbon allowances to cover their emissions. The price of these credits can be regulated by local, national or supranational laws and regulations.
Understanding How Carbon Credits Are Priced
In addition to cap-and-trade systems, there are other ways that greenhouse gas emissions can be priced, such as payments for emission reductions (also known as carbon offsets) and results-based finance mechanisms.
The value of a carbon credit depends on the economic value of the impacts delivered by its underlying project. This can range from country-level, for example, the life-saving health benefits of community clean cookstoves in Kenya, to more global-level, for example, the environmental and climate benefits of the Brazilian Amazon Forest.
Buyers often have high expectations for the quality of carbon credits they purchase to offset their own emissions. They want to know that the credits they purchase are from organizations that are dedicated to seeking impacts beyond carbon reduction, such as social development and biodiversity protection.
There is a lot of heterogeneity in the carbon market, resulting in a wide range of products that can be traded on exchanges and in the over-the-counter markets. Creating a standardized product with core carbon principles and standard attributes would simplify the process of trading credits, increase transparency, and promote liquidity on exchanges.
Moreover, a standardized product could help companies with sustainability goals to make investments that are more consistent with their own plans. It is especially relevant for companies with net-zero carbon goals.
One way to make a more unified product is to create reference contracts that combine a core contract, based on the carbon principles described above, with additional attributes that are defined according to a standard taxonomy and priced separately. These reference contracts would then be used to price credits on the market, enabling end buyers to make more informed purchases.
The reference contract approach would also help companies set internal carbon credit pricing to guide their investments and ensure that they are paying the right price for credits that can be used to achieve their sustainability goals. This is important because it would allow businesses to ensure that they are not paying for credits that they may have used to commodify their pollution as opposed to reducing it.
