Carbon Credit Market Expire

It’s no secret that the carbon credit market has been growing. According to Trove Research, it’s on track to hit a record of $6.7 billion by 2021. In fact, the number of “unretired” emission reduction credits could grow to hundreds of millions of dollars. That’s why it’s important to understand the ramifications of the upcoming demise of the CDM.

In short, the carbon credit exchange is a program run by the United Nations Framework Convention on Climate Change (UNFCCC) to reduce greenhouse gas emissions. It’s designed to spur cooperation between nations and to help reduce global warming. However, its underlying methodology is riddled with flaws.

One example of this is the lack of reference data. A major hurdle in past market growth was the lack of accurate benchmarks to judge the merits of a given project. The good news is that the rules of the game have been laid out and the baselines have been set.

Will the Carbon Credit Market Expire?

The most important metric is the amount of greenhouse gas removed from the atmosphere. This is not the only measure of success. There are a myriad of other metrics to consider. For instance, how many tons of CO2 are removed? Are these emissions offset by other measures such as renewable energy generation? And are they verified? The latter question is particularly important to companies attempting to meet the Kyoto Protocol’s NAAQS target for CO2 emissions.

The best way to assess the true value of a particular carbon offset is to evaluate its quality. The most valuable is an offset with a vintage near the three to five year mark. The longer an offset is unsold, the more likely it is to sour a buyer’s decision. The least desirable are credits that have been retired for a significant amount of time.

As with any industry, the quality of the tradable products varies. A well-run, standardized system could go a long way toward increasing the liquidity of such transactions. Likewise, the best way to determine the quality of a particular credit is to check the certification data to see if the seller is third-party verified.

There is also the Verra Carbon Standard, a registry of 1,750 projects from more than 70 countries. It’s designed to demonstrate the magnitude of a given project’s carbon output in a standardized manner. The verification system is a big part of the novelty of the carbon credit market. This is the same system used by the Kyoto Protocol’s Clean Development Mechanism. It’s estimated that the VCS has registered almost 796 million carbon units to date.

As the voluntary and traded markets mature, more and more companies will be looking for ways to offset their emissions. This is particularly the case for the oil and gas industries. There are several projects in place in nations such as Switzerland and Japan that aim to buy these credits. The biggest challenge is convincing these corporations to do it. The key is to find a business model that can offset their emissions without causing harm to the environment.