A carbon credit gives its holder the right neutralize one metric ton of CO2 equivalent greenhouse gas emissionsThese credits can be sold and traded on carbon markets or used to offset your own emissions. Once used, they are credits are "retired" and cannot be reused.
There are two main types of carbon credit markets:
- Regulatory Markets (Compliance Markets):
- These markets are government-ordered and controlled.
- Governments create carbon credits to limit the maximum number of emissionsthat any company in their jurisdiction can produce. This is often done through programs "Cap-and-Trade", where corporate emissions are "capped" at an annual limit.
- Companies that have a surplus of credits due to low emissions (e.g., switching to renewable energy sources) can use these credits to trade with other companiesthat exceed their emission limit.
- Credits issued in regulated markets are usually applicable only within one jurisdictionFor example, a credit from California's cap-and-trade program could not be used in Germany.
- Over time, governments are expected to distribute fewer and fewer carbon credits through these programs, thereby reducing supply in regulatory markets and increasing incentives to invest in alternative carbon reduction and removal initiatives.
- Voluntary Markets:
- These markets are primarily intended for private companies and provide them with the opportunity to go beyond the requirements of the Paris Climate Agreement.
- Voluntary markets consist mainly of carbon offsetsA carbon offset is created by a real, independently verified reduction in the amount of carbon in the atmosphere.
- These offsets can arise either through technological solutions (such as carbon capture and sequestration - CCS) or natural solutions (such as reforestation), or through initiatives that replace polluting energy with renewable sources.
- Unlike regulatory markets, a voluntary carbon market globalCredits generated in one country (for example, from the Bonobo Peace Forest project in the Democratic Republic of Congo) can be used to offset a company's emissions anywhere in the world (for example, in Europe or North America).
- Companies like Amazon, Microsoft, Shell, and Delta Airlines already purchase carbon offset credits on the voluntary carbon market.
The potential of carbon credit markets
Carbon credit markets are set to massive growthThey are expected to become a focal point for investment in the coming decades.
- Current and projected market size:
- Global regulatory carbon market is worth more today than $900 billion.
- Global voluntary carbon market had a value of approximately in 2023 $2.5 billion, with forecasts pointing to growth of $100-250 billion by 2030It has huge growth potential.
- Growing demand:
- Global demand for voluntary carbon credits could increase 15-fold by 2030 and 100-fold by 2050.
- To meet the needs of only about 800 companies that have currently committed to net zero emissions, the voluntary carbon credit market must grow at least 1500 %.
- Overall, corporate demand in the voluntary market has the potential to grow by 700 % on the low side and 3,800 % on the high side in the coming decades.
- Growth catalysts:
- Continued growth in corporate liabilities towards carbon neutrality and zero emissions.
- Government initiatives to support the carbon market, including the establishment of global carbon floor price (The International Monetary Fund recommends $85-100 per ton for most countries).
- Enforcing emissions within countries with nationally determined contributions and supporting investment in carbon removal technologies.
- Development of regulatory and business centers, including requirements for accounting for Scope 1, 2 and 3 emissions, and the need for liquid, deep and transparent exchanges for both markets.
- Financial incentives for corporations:
- Companies that focus more on ESG (Environmental, Social, and Corporate Governance) standards gain better conditions for debt and equity financingBonds with a higher ESG rating pay a lower coupon (lower interest payments) on average. This means that the company pays less for its borrowings if it meets ESG standards.
- Global ESG debt issuance to grow to nearly $1.5 trillion in 2024, representing increase of 2,600 % from 2013 to 2020.
- It is expected that emission reports will become line items in financial statementsMost companies will likely be required to report their Scope 1 emissions within the next 5-10 years, with Scope 2 and 3 emissions likely to follow shortly thereafter. This will increase transparency and pressure to reduce emissions.
- Rarity and price:
- With the decreasing supply of credits in the regulatory markets and the increasing demand for voluntary offsets, expects a sharp increase in carbon credit prices.
- The dirtiest sectors, such as road transport, energy providers and steel, which account for 36.6 % of global greenhouse gas emissions, will be the biggest buyers of carbon credits because reducing their operational emissions is expensive and difficult. These costs will either be passed on to consumers or provide an incentive to sell excess credits to those who innovate.
Overall, the carbon credit market is a huge opportunity for those who get in early, fueled by an unstoppable wave of government and corporate finance flowing into this new sector. JRi



