Trade Carbon Credit Futures
The world is in the midst of one of humanity’s greatest challenges: climate change. The concentration of greenhouse gases in the atmosphere has risen rapidly since the pre-industrial era, leading to a warmer planet with changing weather patterns and diminished air quality. Currently, the world needs to cut CO2 emissions by at least 8% per year to reduce global warming. This goal is ambitious and will require businesses and governments to find ways to reduce their carbon footprints. The trading of carbon credits, which are financial instruments that incentivize emissions reductions, may help companies-and the world-meet these goals.
A trade carbon credits is a permit or certificate that represents a reduction in CO2 emissions. In the voluntary market, one credit represents a reduction of up to 1 metric ton of CO2. The trading of these credits-known as carbon offsets in the voluntary market-is an important part of the effort to mitigate climate change.
Individual investors can buy and sell these instruments through a brokerage account. To trade these instruments, open a brokerage account with a broker that offers ETFs (exchange-traded funds). Most major investment apps allow you to create an account and start trading. Once you’ve opened your account, look for the ticker symbols for the carbon credit ETFs that you want to trade. These ETFs will then be traded like stocks on the stock exchange throughout the day.
How to Trade Carbon Credit Futures
As you can see, there is a lot to consider before making a decision to invest in carbon credit futures. If you do decide to invest in these products, be sure to take into account the risks, including volatility and limited diversification. In addition, it’s worth considering how these investments fit into your overall portfolio and whether they align with your ethical goals.
Today’s carbon markets lack the liquidity needed for efficient trading, largely due to the heterogeneity of the assets being traded. For example, the current sourcing standards for carbon credits vary greatly: some have additional attributes, such as land-use and biodiversity benefits or community economic development, that are valued by buyers differently. In addition, carbon credits are sourced from many different locations and projects around the world.
To address these issues, groups such as the Integrity Council on Voluntary Carbon Markets and the Carbon Credit Quality Initiative are working to standardize carbon credit attributes and to define high-quality offsets. However, despite the efforts to create a more consistent supply, the market will likely continue to diverge into two distinct segments: a highly liquid, more expensive market for high-quality credits and a less liquid, cheaper market for all others.
To strengthen voluntary carbon markets and help companies meet their carbon-reduction targets, we need to make it easier to purchase high-quality offsets. This would involve consolidating trading activity around a few types of credits and promoting liquidity on exchanges. It also requires clear demand signals, which are lacking in the current market. This is why we’ve launched McKinsey Carbon Direct, a project to scale up carbon credit markets by providing clear demand signals to encourage companies to invest in low-carbon technologies and reduce their carbon footprints.