Trade Carbon Emission Credits
Carbon emission trading is an important part of the global effort to reduce greenhouse gas emissions and limit future temperature rise. The market is made up of multiple players: traders, brokers, project developers and end buyers – mainly companies that want to offset their own carbon footprint or meet their net-zero goals.
To trade carbon credits, buyers and sellers negotiate a price that is determined by the supply and demand for the carbon credit in the marketplace. The price is also affected by the amount of carbon that is being reduced and the type of project or activity that is reducing it.
For example, a credit that is generated by a biomass project to reduce CO2 is less expensive than one that is generated by a tech-based removal process like carbon capture and storage (CCS). Currently, the price of a credit can range from a few cents to several dollars per metric ton of carbon in voluntary markets. In the voluntary program set up by the state of California, for example, each credit represents a unit of reductions in the air that is equivalent to a specified quantity of carbon dioxide and can be used to meet a company’s reduction obligation under its cap-and-trade program.
How to Trade Carbon Emission Credits
As companies commit to higher and more ambitious net-zero targets, the demand for carbon credit will increase. The value of a credit is based on its ability to reduce a specific amount of greenhouse gases in the atmosphere, and its price fluctuates based on supply and demand, as well as the political environment.
Traders are the intermediaries in this carbon marketplace, connecting buyers and sellers through private conversations and over-the-counter deals. Retail traders, like those who deal in other commodities, purchase large bundles of carbon credits from suppliers and then sell them to end buyers, typically for a commission.
Some of the most active buyers in the carbon market include technology giants, airlines and oil and gas majors. However, more and more industry sectors are joining the carbon market as they adopt their own net-zero commitments or look for ways to hedge against the financial risks posed by the energy transition.
As the demand for carbon credits grows, so do concerns about their integrity. This relates to issues around transparency and accountability, but also the risk of creating “sacrifice zones” where the entities that benefit from the sale of carbon credits are different from those whose lives and environments suffer from their activities.
Resolving these issues is a key challenge for the development of voluntary markets. To support growth, a robust and scalable infrastructure is needed that includes trading, post-trade, financing, data, and verification. In addition, there needs to be greater consensus on the use of carbon offsets to ensure they don’t disincentivize efforts to reduce emissions in the first place or erode corporate claims about their climate action. The McKinsey Institute’s new report outlines how market participants, standard-setting organizations, financial institutions and market-infrastructure providers can address these challenges to scale up the voluntary carbon market.