Carbon trading has become increasingly popular among individuals and organizations as they look to reduce their greenhouse gas emissions. These initiatives often involve buying and selling carbon credits, which are kind of permits that represent one ton of CO2 removed from the atmosphere. One of the most popular options for individuals and businesses is to trade carbon credits on a carbon credit exchange, which is similar to an online stock market. However, investors should be aware of the potential risks and scams that may be associated with investing in these credits.
The voluntary market is growing rapidly and is expected to reach a value of about $6.7 billion by the end of 2021, according to Ecosystem Marketplace. This is due to a growing interest in carbon trading by corporations aiming to meet their net-zero goals and the international commitments made at this year’s United Nations Climate Change Conference, or COP26.
Some states run cap-and-trade programs, where companies that emit carbon credit exchange dioxide must either reduce their emissions or buy carbon credits from those who did. For example, the state of California requires that its 450 biggest emitters cut their carbon emissions by 40 percent by 2030 or pay a fee to stay within its limits. The program is driving a significant increase in the price of carbon credits, which have now reached about $41 per metric ton.
However, it’s not always easy for companies to participate in the voluntary carbon credit market. The number of different standards, rating agencies, projects and brokers involved can make it difficult to track high-quality versus low-quality credits. In addition, over-the-counter trade can be a time-consuming process, which increases barriers to participation. This is why the Australian government is working to centralize carbon markets by developing a new platform called ACX, which will streamline the sale and purchase of Australian Carbon Credit Units, or ACCUs.
As a carbon market platform, ACX will use blockchain smart contracts to create digital tokens for carbon credits that are used in spot markets. These digital tokens can be securely stored and cleared by the ACX Clearing Corporation, a recognized clearing house that will use blockchain smart contracts to settle and clear all transactions. In the future, ACX will also introduce carbon credit futures as well as other commodity derivatives that are based on the platform’s digital tokens.
Investors should be aware that any firm offering to sell carbon credit investments through an exchange is unlikely to be regulated by the FCA. This means they won’t be able to offer the protections of the Financial Services Compensation Scheme or the Financial Ombudsman Service should they need them. It’s also important to check whether the company is on the FCA’s warning list, which includes firms that are not authorised or regulated by us. This means they are unlikely to have the required level of skill and expertise to provide financial advice and should be avoided.