Companies Trade Carbon Credits
Carbon markets have stirred interest among those looking to reduce their environmental footprint and those wishing to support efforts to combat climate change. While there are those who see the growth in these markets as a positive development and others who openly criticize them, the fact remains that companies – both large and small – have been adopting tools or technologies to lessen their impact on the environment and be more eco-friendly.
The growth in the trade carbon credits market can be attributed to several factors. One is the desire to meet corporate sustainability objectives, which often include the requirement to limit emissions to a certain level. This is known as a “cap-and-trade scheme” and operates through the allocation of allowances (also called emissions credits) to participants who can then trade them on a regulated market.
Another factor is the increasing awareness of the importance of natural capital, which includes a stable climate and a prosperous ecosystem. This can lead to a greater reliance on renewable energy and even the purchase of carbon credits from projects that would otherwise be uneconomical.
How Companies Trade Carbon Credits
A third factor is the growing recognition that a low-carbon economy will be more competitive, especially in a globalizing world. This is the reason behind many initiatives to promote a low-carbon economy, including the recent Paris Agreement, which was adopted by nearly 200 countries in December 2015 and will be formally entered into force in 2020.
In a regulatory market, companies are required to keep their emissions below a set threshold and can be fined heavily for exceeding it. As a result, they look to the carbon market to trade carbon credits – also known as Certified Emissions Reduction (CER) credits – that have been generated by reduction projects to ensure compliance with their emissions cap.
There are different types of carbon credit trading, but the two main categories are carbon removal and avoidance. The former refers to projects that capture and store carbon in the ground, for instance reforestation, afforestation or soil-storage technologies like enhanced oil recovery. These are referred to as “carbon removal” credits and typically trade at a premium over avoidance credits.
By contrast, the avoidance category refers to projects that prevent a business from emitting CO2 or equivalent greenhouse gases, such as energy efficiency, renewable energies and measures to reduce methane emissions from agriculture. These credits are often referred to as “carbon dioxide equivalent” (CO2e) emissions.
Carbon credit trading involves converting carbon dioxide and other greenhouse gas emissions into units called credits, with each unit representing a metric ton of reduced, avoided or removed carbon. The credits can then be traded on a regulated exchange or through over-the-counter transactions.
The Platts carbon market collects bid, offers and trade data for these various types of credits. This data is used to calculate prices, which are based on the credits’ attributes and standards.
In addition to enabling price discovery, the Platts carbon market provides critical infrastructure for the carbon industry. This includes the carbon clearinghouse, meta-registry and supply-chain financing platforms. Its resilience and scalability are crucial to the growth of liquid carbon markets.