marken owens's blog : What is the Future of the Carbon Credit Market?
The carbon credit market consists of businesses that seek to offset emissions by buying credits from projects that have reduced greenhouse-gas (GHG) levels. The market is a key part of the effort to limit global warming. Companies buy the credits in order to achieve their net-zero emissions targets.
To link supply and demand, brokers and retail traders operate in the market, much as they do in other commodity markets. They purchase the credits from suppliers and bundle them into portfolios that range in size from hundreds to thousands of equivalent tons of CO2. Then they sell the portfolios to end buyers, usually with some commission.
The global carbon credit market has grown rapidly in recent years. It now encompasses a wide variety of projects, from reforestation to reducing GHG emissions from power plants to carbon capture and storage from coal-fired generation.
However, the current voluntary carbon credit market is characterized by a lack of standardization and quality assurance. Many of the carbon credit market on the market are backed by questionable claims. Buyers have become increasingly discerning about the quality of the credits they purchase. At the same time, oversight bodies are uniting and making substantial progress towards a new consistent integrity framework for the entire voluntary carbon market and its credits.
These improvements will not be easy. Buyers will need to continue demonstrating their willingness to pay for the most reliable and high-quality credits, even at a premium. They will need to be willing to invest in a diverse range of projects, including community-based projects, which produce lower volumes and are typically more difficult to certify, as well as industrial projects that generate additional co-benefits such as sustainable agriculture and economic development.
At the same time, suppliers need to ensure that their projects are implemented with a view to protecting local communities and ecosystems. This will mean developing a greater diversity of project approaches, ensuring that project designs take into account the needs of local communities and working to promote the use of innovative financing instruments such as carbon finance, which provide financial incentives for projects with social and environmental impacts.
Other important steps include establishing more robust spot price benchmarks that can serve as central pricing reference points for carbon, in the same way that West Texas Intermediate and Brent Crude act as central benchmarks for oil. This will facilitate long-term contracts and reduce information asymmetry, and it will help to develop a carbon market that has the potential to scale.
Finally, the market must work to increase the rate at which carbon-reducing projects are developed and brought to market. At the moment, most of the potential supply of credits from avoided deforestation and natural-gas sequestration is concentrated in a few countries. The market will need to create a system of credit-trading that can support this growth, and build a more robust infrastructure for high-volume trades. This will involve the creation of a set of reference contracts that combine core carbon principles and standard attributes, similar to how futures contracts are structured in other commodity markets.
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