Companies Invest in the Carbon Credit Market
Carbon credits are emissions reductions that can be purchased and used to offset a business’ greenhouse gas (GHG) footprint. While the market has exploded in recent years, there are still many questions about its integrity, as well as growing demands for it to drive greater social and environmental benefits. This new trend means investors must increasingly prioritise co-benefits in the design of carbon projects if they want to maximise their investment opportunities and support a truly sustainable transition.
Companies looking to invest in the carbon credit market often work with project developers to finance their development or ‘additionality’ costs. This includes the costs of reducing or avoiding emissions beyond what a business is legally required to do as part of its operations. For example, a company could invest in carbon credits to offset the GHG emissions from driving its fleet of cars, or from electricity generation.
The carbon market is not regulated, but it does operate in several countries around the world. In a cap-and-trade program, regulators set a limit on emissions, and companies can earn or purchase credits to stay below that cap. A company with excess capacity can sell credits to a company that needs them, or to other companies in the program.
How Can Companies Invest in the Carbon Credit Market?
There are three types of carbon credits: Emissions reduction, forestry, and land-use change. Each type of carbon credit has a unique set of requirements and methodologies for demonstrating the underlying climate impact. There is also a requirement that carbon credits are’retired’, or removed from the market, once they have been claimed and used to offset GHG emissions.
Carbon credits are typically sold on a voluntary basis, but the underlying reductions can be verified for quality and credibility. The issuance of high-integrity credits is a key factor in increasing investor confidence in the market and in achieving broader societal acceptance of the carbon market as a responsible climate solution. High-integrity projects meet criteria established by initiatives such as the Carbon Credit Quality Initiative, ICVCM’s Core Carbon Principles, and the Tropical Forest Credit Integrity Guide.
In addition to ensuring that credits are of high quality, the carbon market requires all participants to be transparent about their actions and transactions. Disclosures are made via public registry systems and a variety of other mechanisms, including direct access for investors.
A ‘credit’ is only valid for a specific offset amount, so each time a carbon credit is used to cancel out a tonne of GHGs it must be retired from the market. This is done on a publicly available registry and ensures that the credits cannot be used again, or sold to other businesses.
As the demand for carbon credits continues to grow, more companies are leveraging this investment opportunity as they seek to address climate change concerns and to set their own net zero targets. As such, it is essential that investors understand the risks and complexities of this emerging market in order to make informed decisions. To this end, we have developed a report highlighting the key factors that are most critical for success in the carbon market, based on survey data from over 400 markets participants and open-sourced market intelligence on capital raises.