Can Carbon Credits Be Traded Internationally?

Can Carbon Credits Be Traded

Carbon credits are essentially permits that allow companies and individuals to offset the emissions of their activities. The credits are generated by projects that reduce, avoid or remove carbon dioxide from the atmosphere. They are often produced through a variety of ways: by switching from fossil fuels to renewable energy, reforestation or wetlands management, or even by using tech-based removal projects like direct air capture and carbon capture and storage. The resulting carbon credits can be traded internationally on a voluntary basis, or used to meet compliance requirements in domestic or regional markets under a cap-and-trade program.

While some governments have regulatory markets for carbon trading, the vast majority of international trades in carbon credits occur on a voluntary basis. These market players range from nongovernmental organizations to individual private citizens and businesses that want to offset their own emissions or invest in clean energy technologies. Buyers and sellers of carbon credits are linked through brokers and retail traders who purchase or sell them in private conversations and over-the-counter deals. In addition, some larger companies with corporate sustainability goals have in-house teams that manage their own purchasing and trading.

The voluntary trade carbon credits market currently suffers from a lack of liquidity. This stems in part from the heterogeneity of carbon credits. Each credit has a set of attributes related to its underlying project, and buyers value those attributes differently. In addition, the verification process can take a long time. This makes the matching of a potential buyer with a supplier a cumbersome, inefficient process that is conducted over-the-counter.

Can Carbon Credits Be Traded Internationally?

One way to address the issue is to standardize those attributes into a common taxonomy. This would help the marketplace by providing a consistent and transparent way for all carbon credits to be assessed, and it could also speed up the process of matching buyers with suppliers. It would also help to create a credible and trusted global marketplace for carbon, making it easier for governments and companies to implement their NDCs.

As technology advances, it is possible that some companies will be able to reduce their emissions substantially without the need for carbon credits. However, for those still years away from being able to do so, carbon markets can help them to stay in compliance with their regulatory emissions targets by buying emissions reductions from other companies or nations.

The success of these markets depends on the existence of a digital infrastructure that keeps verified data secure, and ensures that GHG emission reductions are accurately reflected in national or international Registries. This requires robust Monitoring, Reporting and Verification (MRV) systems and innovative solutions to keep costs down and reduce data duplication. This is the only way that an international carbon market will be able to function. Otherwise, it is unlikely that the world will be able to get any closer to its NDCs and avoid catastrophic climate change. McKinsey’s carbon-market experts include Christopher Blaufelder, partner, Zurich; Cindy Levy, senior partner, London; Peter Mannion, associate partner, Dublin; Dickon Pinner, senior partner, San Francisco; and Jop Weterings, director, Amsterdam office.