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  • Writer's pictureCamila H. Kraus

LuxCS in Focus Series 4: How does the commercialization of carbon credits happen?

In the third article of our LuxCS in Focus series, we addressed the subject of "International Codes of Best Practice", in which we talked about the IOSCO (International Organization of Securities Commissions) recommendation to separate the issuance of carbon credits in the primary market and the trading of credits in the secondary market. Today we will briefly revisit these concepts to establish the role of each stakeholder and better understand a subject that attracts the interest of many stakeholders: How to trade carbon credits.

So, before talking about the sale of credits, it is important to explain the differences between the primary and secondary carbon markets. The primary market is where greenhouse gas (GHG) emission reduction projects are developed, verified, and certified by independent entities, generating carbon credits. The stakeholders in the primary market are landowners, project developers, auditors, investors, and carbon credit certifying entities.

Stock exchange monitor screen showing stock trading. Carbon credits are financial assets that can be traded on stock markets.
Carbon credits are digital financial assets that can be quoted and traded on the stock exchange, or sold by other means.

The secondary market is where already certified carbon credits are traded among different agents, such as companies, financial institutions, stock exchanges, governments, or individuals who wish to offset their emissions voluntarily or meet regulatory targets.

Thus, while the primary market deals with the certification of carbon credits, the secondary market deals with the trading of these credits. With few exceptions, such as landowners who will become the initial sellers of credits, for example, these markets should avoid mixing to avoid conflicts of interest.

Certifiers should not trade carbon credits.

For governance reasons, carbon certifiers should not trade the credits they generate, at the risk of incurring conflicts of interest and damaging the credibility of their assets. Carbon certifiers have the function of validating, verifying, and certifying emission reduction projects, following the criteria and methodologies of international best practice codes. By trading carbon credits, carbon certifiers would be acting as judges and interested parties, which would compromise their impartiality and transparency. Therefore, carbon certifiers should limit themselves to offering technical services, without interfering in the carbon market.

So, how are carbon credits sold?

Carbon credits are tradable by the project owners themselves, who can trade them on online trading platforms, financial institutions, stock exchanges, through specialized intermediaries or by direct sales agreements between interested parties. The trading of carbon credits is based on the supply and demand of the voluntary market, which is influenced by factors such as quality, location, type, and social and environmental impact of the projects.

Banking institutions can also acquire carbon credits generated by projects and use them to meet their own emission reduction targets or resell them in the market. Some of these institutions support projects for the generation of carbon credits and the trading of these credits for companies seeking to offset their greenhouse gas emissions.

Thus, carbon credits are a way to encourage the reduction of greenhouse gas emissions and promote sustainable development, while generating income for project owners. Carbon credits can be sold in different ways and to different audiences, depending on the characteristics and objectives of each project. The voluntary carbon market is dynamic and presents opportunities for the development of various sectors of the economy.

If you are interested in participating in the carbon market, come and learn about the LuxCS notices.

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