A carbon credit is a certificate that proves a project reduced or removed a specified amount of carbon dioxide from the atmosphere. It can be used to offset the emissions of a company or individual, and is often traded in carbon markets around the world.
The price of a carbon.credit exchange depends on a lot of factors, including the type of project (e.g., a renewable energy power plant or an oil-to-gas conversion facility), its geography, vintage and delivery time. It can also be influenced by the type of carbon reduction standard the project is generating credits against. For example, a credit generated by a community-based project that also helps meet some of the UN’s Sustainable Development Goals (SDGs) may trade at a premium to a traditional industrial project.
Some of these projects are developed and operated by businesses that have a contractual requirement to participate in carbon credit exchanges – known as compliance carbon markets – while others are independently verified and created by non-compliant entities. The vast majority of VCCs are sourced from the voluntary market, where demand has increased in recent years due to climate change concerns and efforts by companies and individuals to mitigate their impact on the planet.
A VCC is only valid if it has been issued against an established international carbon removal or reduction standard. There are many different carbon credit standards, and each has its own verification process. Some are more rigorous than others, and they can take several years to complete. Credits that are self-verified do not carry as much value to potential buyers, so the verification process is key to the integrity of the market.
Once a project developer has collected the necessary data, it is sent to an independent third-party verifier. The verifier will assess it against the requirements of the selected carbon credit standard and conduct a site visit, if needed. Then, the verifying body will issue the verified carbon credits and register them with the relevant program.
VCCs can be bought and sold in the carbon credit exchange and in the voluntary market. Traders, brokers and retail traders connect supply with demand by buying and selling VCCs, just like any other commodity. They typically earn a commission on the sale.
To make the VCC trading process easier, exchanges have started to create standardized products that guarantee certain basic specifications are respected. In particular, exchanges such as Xpansiv CBL and ACX have set up products labeled with the N-GEO or N-GEO+ label. This ensures that credits marketed with these labels have a specific kind of underlying project, are of relatively recent vintage and are certified against a restricted group of standards. These standardized products are currently preferred by most end buyers that need to purchase credits to offset their emissions. They allow them to carefully examine each underlying project, ensure they meet their specific requirements and protect themselves from accusations of greenwashing. However, some end buyers still prefer to buy individual credits in order to gain the flexibility to select the best project for their needs.