Should I Buy Trade Carbon Credits?
Buy Trade Carbon Credits
Carbon markets have been around for roughly 25 years, but many people are unaware of them or don’t understand their role in fighting global warming. The Taskforce on Scaling Voluntary Carbon Markets estimates the global market could reach $50 billion by 2030, and interest in carbon credits shows no signs of slowing down.
A trade carbon credits permit that limits the amount of carbon dioxide and other greenhouse gases (e.g., methane and nitrous oxide) that a company may emit over a specific period of time. A credit’s value, or price, fluctuates depending on demand, supply, and climate policy. For example, under the 1997 Kyoto Protocol International Treaty, industrialized countries that met their emission reduction commitments would sell excess credits to developing nations. This was known as the Clean Development Mechanism.
As the carbon market grows, more investors are looking to get involved. But before you decide to invest in a carbon-credit ETF, it’s important to consider the potential risks, which include volatility and limited diversification. Additionally, questions about the actual environmental impact of carbon credits could limit your investment return.
Should I Buy Trade Carbon Credits?
The primary purpose of carbon markets is to reduce emissions by providing incentives for companies to find innovative ways to cut their greenhouse gas footprints. The market also helps to incentivize companies to use carbon capture technologies that allow them to reuse or offset their own emissions.
Currently, most carbon trading takes place in the voluntary market, which is composed of private traders and non-governmental organizations (NGOs). These players purchase individual carbon credits from suppliers, bundle them into portfolios that range from hundreds to thousands of equivalent tons of CO2, and then sell them to end buyers — companies that have pledged to offset their emissions or governments that are working towards net zero energy goals.
In addition to the voluntary carbon market, several countries and regions operate mandatory schemes that require businesses with high emissions to buy credits in a “compliance” market. These programs are usually based on the Kyoto Protocol or one of its successors, including the Paris Agreement, and they can be found across Europe, North America, China, Japan, and elsewhere.
Regardless of the type of carbon market, participants must adhere to strict regulatory rules to ensure their carbon credits are legitimate and verifiable. This includes requirements that verify the origin, quality, and tradability of carbon credits. The verification process involves an independent party evaluating a project’s performance against set criteria. In addition, it is crucial that the carbon credit market provides clear demand signals to help match buyers and sellers.
Individuals can’t trade carbon credits directly; they must invest through carbon-credit ETFs, which are traded on the same exchanges as stocks and bonds. In order to do so, individuals must have a brokerage account or sign up for one on an app that offers the option of trading ETFs. However, as carbon-credit ETFs are volatile and speculative, they should make up only a small portion of a portfolio.