What the carbon markets do is turn CO2 emissions into a commodity by giving it a value. These emissions fall into one of two categories: Carbon Credits or Carbon Offsets, and they can both be bought and sold on a carbon market. It’s a simple idea that provides a market-based solution to a thorny problem. The terms are frequently used interchangeably, however Carbon Credits and Carbon Offsets operate on different mechanisms. When a company buys a Carbon Credit, they gain permission to generate one ton of CO2 emissions. When a company removes a unit of carbon from the atmosphere as part of their normal business activity, they generate a Carbon Offset.

The are two distinct market segments, one is a regulated market, set by “cap-and-trade” regulations at the regional and state levels. The other is a voluntary market where businesses and individuals buy Carbon Credits or Carbon Offsets of their own accord to offset their carbon emissions.

Under what is known as a “cap-and-trade” program, regulators set a limit on carbon emissions – the cap. That cap slowly decreases over time, making it harder and harder for businesses to stay within that cap. You can think of carbon credits as a “permission slip” for a company to emit up to a certain set amount of CO2e that year.

Around the world, cap-and-trade programs exist in some form in California, Canada, the EU, the UK, China, New Zealand, Japan, and South Korea, with many more countries and states considering implementation. Participation in a cap-and-trade scheme typically isn’t voluntary, a company needs to abide by carbon credit limits set by regulators. As more and more countries adopt cap-and-trade programs, companies increasingly need to participate in carbon credit programs.

In essence, a cap-and-trade program lessens the burden for companies trying to meet emissions targets in the short term, and adds market incentives to reduce carbon emissions faster and stay under their cap. When it comes to the regulatory market, each company operating under a cap-and-trade program is issued a certain number of Carbon Credits each year. 

Mandatory schemes limiting the amount of greenhouse gases that can be emitted have proliferated—and with them, a fragmented carbon compliance market is developing. The European Union has an Emissions Trading System (ETS) enables companies to buy carbon credits from other companies.

The voluntary market is where businesses and individuals buy Carbon Credits or Carbon Offsets of their own accord to offset their carbon emissions. Think of it this way: the regulatory market is mandated, while the voluntary market is optional. 

The voluntary market is open to individuals, companies, and other organizations that want to reduce or eliminate their carbon footprint, but are not necessarily required to by law. Companies in the voluntary marketplace have the opportunity to work with businesses and individuals who are environmentally conscious and are choosing to offset their carbon emissions because they want to not because they are mandated to do so.

The voluntary carbon market is difficult to measure since the cost of Carbon Credits varies, particularly for Carbon Offsets, since the value is linked closely to the perceived quality of the issuing company. Third-party validators add a level of control to the process, guaranteeing that each carbon offset actually results from real-world emissions reductions, but even so there’s often disparities between different types of carbon offsets.

In 2021, higher carbon prices, revenue from new instruments, and increased auctioning in emissions trading systems have resulted in a record USD 84 billion of global carbon pricing revenue, around 60% higher than in 2020.

According to the Taskforce on Scaling Voluntary Carbon Markets (a private sector initiative started by the U.N.’s Special Envoy for Climate Action and Finance: ’’The voluntary carbon markets will need to grow between 5x to 15x by 2030 in order to satisfy the growing demand for carbon credits’’.

The global compliance market for carbon credits in 2020 according to Refinitiv the total market size is US$261 billion and growing year on year. Last year the voluntary carbon market was estimated to be worth about $400 million, forecasts place the value of the sector between $10-25 billion by 2030, depending on how aggressively countries around the world pursue their climate change targets.

The World Bank 2022 Carbon Pricing Report confirms that global carbon pricing is generating record revenues but identifies that much potential remains untapped. Its annual report on the State and Trends of Carbon Pricing  shows positive signs, particularly in relation to higher carbon prices and increased revenues from Carbon Credit and Carbon Offset trades.

Tesla, the electric car maker sold Carbon Credits to Legacy car manufacturers for $518 million in just the first quarter of 2021 keeping Tesla out of the red. If the market for carbon credits continues to go up, and the pricing of credits keeps increasing, Tesla and other environmentally beneficial businesses could reap huge dividends.

Buyers and sellers can also use an exchange platform to trade, which is like a stock exchange for carbon credits. The quality of the credits is based in part on the validation process and sophistication of the fund or development company that acted as the sponsor to the carbon project. This is reflected in their price; voluntary units typically have less value than the units sold through the rigorously validated Clean Development Mechanism.

The European Union's Carbon Credits traded from $7.78 to $25.19 averaging $16.21 per ton in 2018. Although it remains in development, it is anticipated that the value and trading of Carbon Credits will continue to grow particularly as several governments have committed to "green recoveries" following the COVID-19 pandemic recession.

With tremendous growth prediction, there are massive opportunities for investors in the Carbon Markets. But despite the flurry of activity in the sector, the carbon marketplace is still in its infancy. As things stand right now Carbon Credits and Carbon Offsets face a lack of accountability.

A lot of work being done right now to create a global unifying standard one that would fit all requirements established in Article 6 of the Paris Agreement, which was finalized at the COP 26 climate conference in Glasgow November 2021.  

The lack of a single unifying standard makes it harder for people to purchase and trade Carbon Credits and Carbon Offsets on the voluntary markets. When you buy a gold coin or a gold bar from one of the multiple gold retailers around the world, you know what you’re buying, and you will be able to establish its value.

When it comes to Carbon Credits and Carbon Offsets, it’s a lot harder to get that same information. While some commodity exchanges have been making headway into grouping similar Carbon Credits and Carbon Offsets into tradeable categories, it’s still very much a work in progress.

  

The reason that Carbon Credits and Carbon Offsets lack accountability and transparency is that there’s no single, universal standard for carbon. Instead of an official international standard all carbon market certification is left in the hands of a number of private third-party firms.

Offsetting projects certified by these private third-party firms, might not offset as much as they claimed to, might not last as long as they should have and might have harmful side effects on local communities and environments, or some might have a combination of all three.  

Poor recordkeeping and auditing processes create a possible scenario to what’s called “Double Counting” which is what happens when a Carbon Credit or Carbon Offset is claimed and retired twice. The result is two tonne of carbon emissions reductions claimed when only one tonne was actually offset.

Given that demand for Carbon Credits and Carbon Offsets will continue to increase and the outlook for growth remains very strong we created of Paulownia NFT 's to offer a investment solution eliminating double counting.