Purchasing carbon credits allows businesses and individuals to offset their emissions. However, it is important to understand that not all markets are created equal. There are two different types of carbon markets: those that are mandatory and those that are voluntary. Companies that have to comply with a carbon cap-and-trade program are issued a certain amount of carbon credits each year, which they use to reduce their emissions or sell to others for a profit.
In the compliance market, the credits that companies must purchase are called allowances. They are issued for each metric ton of carbon dioxide or its equivalent that a company emits. Buying carbon allowances allows polluters to avoid a penalty comprised of fines and extra taxes.
The voluntary carbon.credit exchange market is growing rapidly, with projected demand for carbon credits up to 15 times today’s level by 2030 and 100 times by 2050. This demand is driven by a broad array of buyers, including government agencies and private companies that have corporate sustainability targets, as well as consumers and investors who are increasingly aware of the link between global warming and their lifestyles.
Voluntary credit purchases are also a way for companies to demonstrate their commitment to decarbonization, while signaling to consumers and investors that they care about the environment. These credits direct funding to projects that would not otherwise be possible, such as reforestation and other nature-based solutions, which can protect biodiversity, improve air quality, and generate jobs.
As a result, the voluntary carbon market has grown to become an increasingly important source of climate finance for developing countries. It has the potential to unlock billions of dollars in investment, while addressing the world’s most pressing climate challenges. Despite the growing importance of this market, it still faces several key barriers to its growth. These include poor liquidity, a lack of efficient trading, and insufficient risk-management services.
For example, most of the current supply of high-quality carbon credits is coming from small- and medium-sized projects that are difficult to verify. This is a problem for both suppliers and buyers, since it takes a long time to establish and validate new projects.
One way to address this issue is to standardize the attributes of the credits that are traded on the market, so that they can be matched more efficiently between buyers and suppliers. This will require the development of a taxonomy that defines the characteristics that are essential for a carbon credit to be considered an emissions reduction.
Another way to help make this process more efficient is to ensure that the attributes of each credit are verified and certified by an independent organization, so that buyers and sellers can be sure that the credit they buy or sell is an accurate representation of actual emission reductions. This approach could ensure the integrity of the voluntary carbon market and strengthen the confidence of investors and consumers. These initiatives are all necessary steps toward establishing a more sustainable, responsible, and legitimate carbon market. They also represent an important step toward the global goal of limiting warming to 2 degrees Celsius.