Voluntary Carbon Markets
The voluntary carbon markets are growing, and the private sector is becoming more and more aware of the need for lessening its environmental footprint. Companies are adopting new technology to reduce their greenhouse gas (GHG) emissions and become more environmentally friendly. There are two main types of carbon markets: the regulatory market and the voluntary market.
In the regulatory carbon trading market, a company must show that it is actively trying to reduce its GHG emissions. It does this by showing that it is implementing a net zero strategy. If a company is not doing this, it must pay a fine. But companies can also buy credits to offset their emissions. This is called a “carbon credit” or “carbon offset.”
Carbon credits are earned and issued by organizations that meet certain standards. They are typically issued under a cap and trade program. These programs allow businesses and individuals to buy a specified number of carbon credits each year. Companies can purchase these allowances from other businesses, utility companies or other sources.
The Regulation and Voluntary Carbon Markets
When a business or a consumer purchases carbon credits, they are obtaining a permit that allows them to emit a metric ton of carbon dioxide during a given time period. The quota is set by the regulators. A business that exceeds the quota can pay a fine, or it can buy credits from another company.
In the voluntary market, the volume of carbon credits traded at any given time will determine the price. However, there are many factors that can impact the price of a particular carbon credit. For example, the geography of a project will have an impact on the price.
The market is regulated by a legal contract known as the ERPA. There are a variety of methodologies and requirements that must be met by the projects. Projects that meet the UN Sustainable Development Goals (SDGs) will generate higher values for the end buyers, who will receive a greater benefit. Community-based projects are usually more expensive to certify, so they can trade at a premium to industrial projects.
Another major factor affecting the price of carbon credits is the vintage. The price of a particular set of credits will fluctuate based on the supply and demand of the economy. Generally, the carbon price is quoted in euros per tonne of CO2 and other greenhouse gases. Because there are a wide variety of different projects, the price of the same metric ton of CO2 may vary a great deal.
The United Nations Development Programme (UNDP) plays a significant role in the voluntary carbon market. The UNDP advises governments on how to create and distribute carbon credits. It is often involved in national registries, which are necessary for verifying the emission data for a country.
A company with a quota can either buy the credits it needs from other companies or it can sell them to a buyer in the regulated market. The company can then claim a net zero emissions target, which will decrease its carbon footprint.
