Voluntary Carbon Markets
When a company turns to voluntary carbon markets as a potential way to compensate for its carbon emissions, one of the key pieces of information it looks for is the price of carbon credits. With this information, a company can decide how ambitious it can be when setting its emission reduction target and whether voluntary markets can really help in reaching it.
At the same time, a clear price signal for carbon allows players already involved in the market to make sure that they are trading their credit at a price that reflects the real market value.
But putting a price on carbon credits is far from a straightforward operation, mostly because of the wide variety of credits in the market.
Projects emitting carbon credits can be of many different types and sub-types. The nature of the underlying project is one of the main factors affecting the price of the credit. As mentioned above, for example, community-based projects can be priced at premiums to industrial projects.
Carbon credits can be grouped into three large categories or baskets: avoidance projects (they avoid emitting GHGs completely), reduction (they reduce the volume of GHGs emitted into the atmosphere) and removal (they remove GHG directly from the atmosphere).
The avoidance basket includes renewable energy projects—wind and solar power, hydroelectric power, and biofuel development including biogas—but also forestry and farming emissions avoidance projects. The latter, which are also known as REDD+, prevent deforestation or wetland destruction, or use soil management practices in farming that limit GHG emissions—such as projects aiming to avoid emissions from dairy cows and beef cattle through different diets.
The reduction category includes projects that reduce demand for energy (energy efficiency) including for example cookstove projects, fuel efficiency or the development of energy-efficient buildings. Plans to capture and destroy industrial pollutants are also part of this group (destruction of industrial pollutants). Another example is the methane collection and combustion group of projects, which involve the combustion or containment of methane generated through farming, landfills and heavy industry.
In the removal category there are reforestation projects, afforestation projects and wetland management (forestry and farming). Plans to remove the existing carbon in the atmosphere, including direct air capture, and neutralize it with permanent underground storage, fall into this basket (carbon capture).
Other factors impacting price are the volume of CO2 emissions traded (the higher the volume the lower the price, usually), the geography of the project, its vintage –the year when the credit was "produced" (typically, the older the vintage the cheaper the price); and the delivery time.
In current carbon markets, the price of one carbon credit can vary from a few cents per metric ton of CO2 emissions to $15/mtCO2e or even $20/mtCO2e. S&P Global Platts assesses the price of carbon credits traded within the CORSIA voluntary market (Platts CEC), which is one of the few commoditized parts of a market that otherwise defies commoditization. Platts began publishing new daily carbon credit price assessments that reflect nature-based carbon credit (CNC) projects and household device carbon credit projects from June 14, 2021.
Platts defines nature-based projects as forestry and land use including projects that avoid deforestation (including REDD/REDD+), afforestation, reforestation, no-till farming projects, soil sequestration (including biochar), wetland management and/or restoration, and reduced methane from livestock. Projects captured by the Platts household devices carbon credit assessment include clean cookstoves projects, clean water access and improved building energy efficiency projects. The assessment reflects projects that carry standard sustainable development goal (SDG) co-benefits, like good health and well-being.
