The Troubled State of the Carbon Credit Market

The Decline of Carbon Credits

The carbon credit market has been facing significant challenges, leading to a decline in prices. The market's integrity has been a long-standing issue, causing concern among researchers and industry experts. Efforts to address these problems, such as the recent COP28 conference, have failed to deliver the desired results.

Companies' Use of Carbon Credits

Amid the rise of net-zero commitments and environmental activism, companies have been actively engaged in buying and selling carbon credits to reduce their emissions footprint. However, the market for these credits is currently experiencing a breakdown.

Over the past two years, there has been a sharp drop in demand for carbon credits, resulting in a significant decrease in prices. The lack of standardized rules for governing carbon markets is a major contributing factor to this decline. Recent news reports and studies have exposed the system's lack of reliability, further undermining the market.

The Impact on Prices

The price for offsetting one metric ton of carbon dioxide, represented by one credit, has plummeted to $0.64 from $18 in January 2022. Another data source, the Platts Nature-Based Avoidance price, shows a decline to $3.90 per metric ton of carbon dioxide from $11.60 last year. These figures highlight the severe drop in demand and the resulting price collapse.

Understanding Carbon Markets

Carbon markets function by packaging the cancellation of carbon emissions into tradable items, known as credits. Each credit represents the removal of one metric ton of carbon dioxide from the atmosphere, often achieved through activities like tree planting.

There are two types of carbon markets: mandatory and voluntary. Mandatory markets are managed by states or international bodies and involve instruments like carbon taxes. These markets regulate energy-intensive industries such as utilities. On the other hand, voluntary markets allow companies and individuals to trade credits without any legal obligation. It is this voluntary market that is currently facing significant challenges.

One of the key problems in the voluntary carbon credit market is the lack of a centralized platform for trading these credits. Credits can be purchased directly from suppliers in registries or through exchanges. However, there is no universal standard for certification and validation, making it difficult to ensure the integrity of the credits being traded.

The Need for Standardization and Oversight

The lack of standardized rules and oversight in the carbon credit market has led to its current state of disarray. Without a centralized platform to monitor and regulate the market, there is a significant risk of fraudulent or low-quality credits being traded.

Experts believe that tighter oversight and the establishment of clear standards for credit certification and validation are necessary to restore confidence in the market. With proper regulations in place, the prices of carbon credits could soar above $250 per ton.

Advocates were hopeful that the recent COP28 climate conference would provide a solution to these challenges. However, the conference failed to adopt the necessary standards outlined in Article 6 of the Paris Agreement, limiting the potential for market growth.

In conclusion, the carbon credit market is currently in a troubled state due to the lack of standardized rules and oversight. The decline in demand and prices highlights the urgency of addressing these issues. Without proper regulation and certification standards, the market will continue to face challenges in the future.—————————————————————————————————————————————
By: asoni@insider.com (Aruni Soni)
Title: The Troubled State of the Carbon Credit Market
Sourced From: markets.businessinsider.com/news/commodities/carbon-markets-emissions-credits-trading-demand-pricing-climate-change-cop28-2023-12
Published Date: Sat, 16 Dec 2023 13:21:01 +0000