As you might have heard already, last year was an incredible one when it comes to voluntary carbon markets.
According to the analysis group Ecosystem Marketplace, the value of the market has reached one billion dollars already.
We’re still only at the beginning.
And with big events such as the COP26 taking place and setting rules for companies…
The demand for carbon offsets will keep on getting higher in the years to come.
The Paris Agreement means that the carbon market will need to grow a hundred times bigger by 2050…
And the big players are getting in as well, including the big banks like HSBC and Barclays.
Now, we’ve been talking about understanding what carbon credits are for some time, but there’s a few questions that we keep hearing.
Let’s tackle them in order.
1. How Do You Get Carbon Credits?
The long answer would be planting an entire forest, getting the government’s seal of approval, and then selling the obtained credits to companies.
Luckily, there are other options.
For the quick reminder, a carbon credit represents 1 ton of carbon dioxide – CO2 emissions – removed from the atmosphere.
This can be done through several methods, such as planting forests, waste management or wastewater treatment.
When it comes to getting carbon credits, a lot depends on location.
And on top of that, carbon credits were controversial for years.
In the US, cap-and-trade programs are emerging, such as the Regional Greenhouse Gas Initiative, or the Western Climate Initiative, which is a joint program with Quebec.
And while national programs did exist in some countries such as Canada or Australia, private markets grew alongside them.
So another option for getting carbon credits is to buy them individually.
In Europe – which is home to the largest carbon market – the EU ETS framework is used, and works on cap-and-trade as well.
Which brings us to our second question.
2. Can I Sell Carbon Credits?
If the country you reside in allows you to, you can sell your carbon credits to the government.
This is the case in the UK, Australia or Canada.
In the US, it is not possible yet.
But that doesn’t mean you can’t sell carbon credits. It means that the markets are organized by public and private companies.
And it does not mean less money, at all.
After all, selling carbon credits is part of the way Tesla got so far ahead, for one.
Since the carmaker receives them for free – in the form of credits for vehicles that emit fewer amounts of CO2 – they are able to sell them for a full profit.
Who do they sell to…?
The competition, basically. Large carmakers are the buyers, such as Stellantis, who bought more than $2 billion worth of European and U.S. credits from Tesla in the last two years.
And as regulation tightens around carbon emissions, you can be sure that you will see more and more companies basing their profit around carbon credits.
And while it may be easier to buy them for a company, an individual can do so too.
We just touched on the subject briefly, so here’s the last one.
3. Are Carbon Credits Worth Anything?
We answered part of this question by mentioning the growing demand as well as Tesla’s example, but that’s not all there is.
You probably already know that the carbon markets are growing at an incredible pace, but you may wonder where that leaves the credits themselves.
Because buying carbon credits can seem complex, and the prices vary based on market dynamics, it can be hard to estimate what they are worth exactly.
According to Ecosystem Marketplace, the average weighted price for one carbon credit – one metric ton of CO2 removed – is around $4.73 in 2021.
That’s only one estimate, of course, and others price it higher.
Considering the demand for carbon offsets is expected to rise as we get closer to net zero, the prices will grow accordingly.
Well, according to a study named Future Demand, Supply and Prices for Voluntary Carbon Credits – Keeping the Balance this growth in demand should mean that carbon credits should rise to between $20 if we take their lowest estimate …
To $50 per metric ton by 2030.
Which would mean a more than tenfold increase.
That would also mean a $100-180 billion market by 2030, according to this study as well as Bloomberg Green.
What’s more is that offset prices are likely to continue growing for the foreseeable future.
In conclusion, while the carbon market is still a relatively new one, – and to some still a “wild west” – it is a growing one.
While the future may hold surprises and maybe the reliance on offsets will lessen as we develop new ways around the issue, one thing is clear.
Carbon credits are here to stay.
If you want to learn how to invest money in carbon credits, you can read our in-depth article about it.