Where Did Trade Carbon Credits Originate?
The carbon market is booming as companies and individuals seek to neutralize their environmental footprints by purchasing carbon credits. The global credit and offset marketplace is a complex system of supply, demand, trading rules and protocols. As the market evolves, there are several key trends to keep an eye on.
The first carbon markets grew out of the 1997 United Nations Kyoto Protocol, which set targets for 150 countries to reduce greenhouse gas emissions. A key part of the protocol was the Clean Development Mechanism (CDM) that allowed developed nations to reduce their own emissions by funding projects in developing nations, such as planting trees. These projects could earn saleable certified emission reductions or CO2 credits that would be used by countries in the developed world to meet their Kyoto commitments.
Since the Kyoto Protocol, a host of other international and national governing bodies have developed their own systems to cut emissions, including Emissions Trading Systems (ETS). In an ETS, businesses or nations (such as the EU) are issued with a maximum, or capped, amount of pollution permits that they can use. Polluters who exceed their allowance must purchase credits on the market to make up the difference. The first global ETS was launched in 2005, and many other national and regional ETS have followed suit.
The Carbon Market – Where Did Trade Carbon Credits Originate?
In addition to ETS, there are also a number of voluntary carbon markets. These are primarily driven by businesses seeking to meet their own environmental targets or to hedge against the risks of energy transition. A variety of sectors are entering the market, from technology and consumer goods to airlines and oil and gas majors.
One of the most promising developments in the carbon market is blockchain-powered non-fungible tokens (NFTs) that are designed to track and verify the origin, use, and transfer of trade carbon credits. This new class of digital tokens is attracting interest among investors and buyers who are concerned that existing protocols do not adequately address some of the market’s challenges. For example, NFTs can help to clarify the distinction between avoidance and removal credits, which are often lumped together under a catch-all category of “carbon credits,” as well as streamline the process of assessing project eligibility and MRV procedures.
Other promising developments include the emergence of new methodologies to quantify avoided nature loss and natural sequestration projects. These methods are based on scientific approaches to measuring biodiversity and ecosystem services, and may offer more robust methodologies than traditional emissions-based approaches. These methodologies may ultimately lead to the creation of new categories of carbon credits, providing a valuable tool for market participants to identify high-quality projects that can be successfully scaled and brought to market.
As the voluntary carbon market continues to grow, decision makers should consider the opportunities and implications for their businesses. The right approach to carbon finance can help businesses drive innovation and support the transition to a low-carbon economy. Christopher Blaufelder is a partner in McKinsey’s Zurich office; Cindy Levy is a senior partner in the London office; Peter Mannion is an associate partner in the Dublin office; Dickon Pinner is a senior partner in the San Francisco office; and Jop Weterings is director of environmental sustainability, based in Amsterdam.
