Carbon Credits Are Priced

While navigating the carbon market can be complex, there are a few key things to keep in mind. First, a buyer must understand the value of a carbon credit. It is a unique financial permit to avoid greenhouse gas (GHG) emissions through an alternative action. Companies purchase these credits to offset their own GHG emissions or to support GHG mitigation activities through results-based finance.

Each carbon.credit has a specific vintage and delivery date, and a primary purpose of avoiding or removing GHGs from the atmosphere. They are also priced based on the underlying project, and the type of GHG reduction being achieved. For example, a community-based cookstoves project may sell at a higher price than large-scale wind energy projects due to the additional beyond-carbon development benefits they deliver. These include better health, more energy independence, or local economic growth. In addition, the measurable impact of these projects makes them attractive to many buyers who look for the most cost-effective ways to reduce their GHG footprint.

However, even the best-intentioned projects can fail to meet expectations when they are sold at prices below what it costs to maintain a carbon credit project in vulnerable communities. In a crowded and highly competitive carbon marketplace, it’s easy for projects to fall behind or become commodified without safeguards.

How Carbon Credits Are Priced

One solution to these problems is the introduction of carbon pricing. Carbon pricing puts a dollar amount on fossil fuels and their carbon pollution, providing a powerful incentive for businesses and consumers to switch to cleaner alternatives. While it’s not the only solution, a carbon fee could provide the added momentum needed to accelerate the pace of emission reductions.

The most popular way to price carbon is through an Emissions Trading Scheme or cap-and-trade system, which requires governments to set a limit on industry’s total emissions and then allow companies to trade credits with each other to buy and sell permits to emit above or below that limit. The resulting revenue is used to fund emission reduction activities. Cap-and-trade is widely considered the most effective and efficient way to cut GHGs, and has already driven innovations in clean energy.

While there are other methods to more accurately price carbon, including direct carbon taxes and removal of fossil fuel subsidies, it’s important that any method includes a social or environmental cost associated with carbon pollution. This could be reflected in the price of fuels, electricity rates or by regulations that include a broader cost of climate change impacts.

In the voluntary carbon market, the price of credits is determined by supply and demand as well as other factors such as the quality of the underlying project, whether it meets standards like Gold Standard for the Global Goals or a country’s compliance requirements, and the level of verification that is required. The standardized products available on exchanges tend to be preferred by traders and financial players, while end buyers that need credits for carbon offset purposes prefer non-standardized products as this allows them to examine the unique characteristics of each underlying project.