So you’re thinking about investing in carbon credits? That was a wise decision. With climate change on the horizon, many people are looking for ways to make their money work twice as hard while also helping the environment. If you’re an astute investor, you might see a glimmer of hope in emerging markets. If you run an eco-friendly business, you care about both your bottom line and your carbon footprint. Whatever your motivation, you must first gain a thorough understanding of the field.

6 Best Methods To Invest In Carbon Credits

Carbon Credit ETFs
Companies Lowering Greenhouse Gas Emissions
Carbon Credit Futures
Carbon Mutual Funds
Purchase Carbon Offsets
Individual Companies/Stocks

You’ve come to the right place if you want a clear explanation of carbon credits, carbon credit ETFs, and how you can invest in a greener future.

What Is Carbon Credit?

Carbon credits also referred to as carbon offsets, are permits that allow the owner to emit a specific amount of greenhouse gases. Carbon dioxide is the primary greenhouse gas; this has been abbreviated to ‘carbon,’ but carbon credits apply to all types of greenhouse gas output. One credit typically allows for the emission of one ton of CO2.

Carbon Credit: Definition, Types and How Does It Works

Emitters are classified into two types. A coal-fired power plant is an excellent example of a direct emitter, whereas every business that uses that power is an indirect emitter. Even service businesses, which may not appear to contribute directly to emissions, do so – for example, flying to client meetings.

Historically, carbon emissions were not measured, and there was no cost to the emitters. However, by actively measuring carbon output, a cap-and-trade system can be used to effectively price carbon. In the 1990s, this system was successfully used to combat sulfur dioxide pollution in the United States. Emitters were given an economic incentive to reduce production levels by imposing a cost on sulfur pollution. To combat carbon emissions, the same model is being used. The total carbon emissions are capped in this structure and can be gradually reduced over time.

Companies and nations then use the exchanges to trade carbon credits based on whether they need them or have an excess. High emitters will buy credits from companies with low or negative emissions, creating an economic incentive to reduce these emissions because they now have a measurable cost.

There Are Two Principal Types Of Emissions Trading

Mandatory
Voluntary.

How Voluntary and Mandatory Carbon Markets Work?

Mandatory markets are formal reduction schemes in which companies and governments use credits to achieve agreed obligations, such as the Kyoto Protocol.

Voluntary carbon credits are used by businesses that want to reduce or remove their carbon footprint for reasons of ESG responsibility.

These credits can be traded between companies but cannot be used to satisfy international obligations.

How to Invest in Carbon Credits?

With climate change becoming more visible, you might think that investing in carbon credits would be simple and straightforward. Unfortunately, carbon credits in the United States are mostly voluntary, with only California and New England following the EU’s lead and developing their own cap-and-trade programs and ETS.

Individual Investors

Purchasing carbon credits is not as simple as you might think. Individuals cannot trade in carbon credits directly, so if you’re an investor wondering how to invest in carbon credits, you’re out of luck. However, there are several options available to help you invest in a more environmentally friendly future.

Carbon credit ETFs, or low-carbon ETFs and mutual funds, are one of the simplest and lowest-risk ways to invest in carbon credits. Another excellent option is to invest in companies that seek carbon offsets to reduce their carbon footprint. Finally, experienced investors can use carbon credit futures to advance their investment strategy.

Carbon Credit ETFs

Mutual funds are popular, user-friendly, and simple to trade. A mutual fund can be thought of as a type of collective investment portfolio. When you invest in a mutual fund, you are investing alongside other investors in a collection of assets.

A money manager oversees your mutual fund, curating a portfolio of stocks, bonds, and other assets. Their decisions are based on the prospectus of the mutual fund. The prospectus is a description of the mutual fund. It contains details on investment strategies and objectives, fund management, fees, and distribution policies.

Mutual funds are an excellent choice for a hands-off approach to portfolio diversification. Otherwise, you’d have to review each company’s environmental, social, and corporate governance (ESG) standards on your own. Because mutual funds have well-defined strategies and objectives, you can invest with confidence in things that align with your values.

“What is a carbon credit ETF?” you may ask. You’re not by yourself. With one major exception, an exchange-traded fund (ETF) is similar to a mutual fund. ETFs, like mutual funds, are asset pools. ETFs, on the other hand, are traded like stocks. During normal trading hours, you can buy and sell ETFs through brokerage accounts.

Greenhouse Companies

If you’re comfortable shopping for your own investments and are familiar with trading, investing in green companies directly is a great option for you. With a little research, you can build a diverse portfolio of companies that reduce their greenhouse gas emissions and sell the excess carbon credits.

Sustainability — global warming regulatory system

You can invest in carbon offsetting if you choose to invest in companies dedicated to reducing greenhouse gas emissions. The benefit of investing in companies dedicated to carbon offset is that it is more active than carbon credits. After all, the carbon credits that were sold still equated to greenhouse gas emissions.

Carbon offsetting businesses begin by removing carbon and other greenhouse gases from the atmosphere and selling them to environmentally conscious businesses. You could put your money into companies that handle everything from reforestation to green energy production.

Keep your end goals in mind when deciding how to invest in carbon credits.

Carbon Credit Futures

If you’re an experienced investor, you might be more interested in using the Chicago Mercantile Exchange to invest in carbon credit futures.

carbon credit investment | carbon footprints

Futures contracts work by pre-determining the value of an asset, most likely a commodity. For example, if solar panels sell for $100 per panel, your futures contract could lock in a price of $120 per panel six months later.

This allows sellers to set a firm price ahead of time, providing some predictability. It also allows investors to speculate on future commodity values.

Futures contracts are available in standard and mini sizes and provide large quantities of their commodity. For example, you could buy a standard futures contract for 1,000 solar panels or a mini futures contract for 500.

When the contract expires, there are two options for resolving it. The first step would be for the investor to physically possess the commodity. You must be able to receive, store, and (most likely) resell whatever commodity you invest in.

Cash exchange is the more common form of resolution. The investor and seller simply exchange the value of the assets on the specified date.

Carbon Mutual Funds

A fund is one of the most straightforward and low-risk ways to invest in the carbon markets. Because many such funds have diversified holdings, they help to reduce the risk of investing in one, but your potential return will be lower as well.

There are several levels of exposure to consider here. Investing in funds labeled “low-carbon” would provide the least amount of exposure to the carbon markets.

These are funds whose mandates aren’t limited solely to carbon-credit-related companies, but also include any company whose operations are thought to have a low environmental impact or companies that have made voluntary emissions reductions or even net zero pledges.

Purchase Carbon Offsets

This is not an investment opportunity. A cap-and-trade market could theoretically allow individual investors to purchase carbon credits as investment products. However, at the time of writing, the EU operates the only full cap-and-trade system, and individual investors are not permitted to purchase credits.

Carbon offsets, on the other hand, can be purchased from a variety of companies. Airline passengers, for example, are frequently offered carbon offset programs. In this program, you typically buy offsets per mile traveled, and the company then takes steps to offset the amount of carbon generated by each mile traveled. If you buy 100 miles of offsets, say, the company would take carbon-reducing actions based on the emissions produced in 100 miles of your flight.

However, this is not a system in which companies hold offset credits, buy credits back or otherwise sell you a tradeable asset in exchange for your money. This is a way of giving back, but you do not gain anything of financial value. Readers who are interested can learn more about this system here.

Individual Stocks

It is difficult to invest in carbon offsets through individual stocks.

Carbon Dioxide | global carbon markets, carbon credit investment

The best way to pursue this investment option is to buy stock in companies that sell carbon offsets, which are a privatized form of carbon credits. That is, you would look for companies that reduce carbon dioxide in the atmosphere and then sell per-unit credits based on those reductions to other companies. For example, a company may sell credit to put 1 ton of carbon into the atmosphere for every 1.1 tons of carbon removed from the atmosphere.

These programs are relatively popular for companies interested in corporate social responsibility. The carbon offset market is largely voluntary, still in its early stages, and comprised of a shifting network of nonprofits and startups. Furthermore, many businesses that participate in carbon offsets will do so through internal projects.

Company Watchlist

The full list with the ticker and prices can be found here. A summary of the two best companies is shown below.

KRBN

The KraneShares Global Carbon ETF invests in EU ETS carbon credits, CCA carbon credits in California, and RGGI carbon credits in the northeastern United States. Despite the fact that the current portfolio weighting heavily favors European Union Allowances, this ETF covers all three major compliance markets, providing good exposure to the growth of the carbon markets with less risk and volatility than the other carbon credit futures ETFs.

NETZ.NEO

Carbon Streaming Corporation is a royalty-based company that aims to build a portfolio of high-quality carbon credit streams. NETZ earns the right to receive all or a fixed portion of future carbon credits generated by carbon credit projects by providing capital to fund them. The sale of these carbon credits can then generate revenue. NETZ, despite being a higher-risk investment, provides excellent exposure to the growth of the carbon markets.

How Much Does A Carbon Credit Cost?

Carbon Credit Price Chart: Live Updates (2023 Carbon Stock Chart)

There is no global carbon trading market. The European Union Emissions Trading System1, currently the largest, is considered the world benchmark. China has a trading program for roughly 40% of its power sector2, with other industry segments to follow. This could become the world’s largest. There are also markets in the United States that have taken a state-led rather than a national approach to carbon trading.

The cost of a carbon credit varies, but it is usually expressed as a cost per tonne of CO2 emissions – or equivalent gases. The World Bank estimates that the price of carbon credit in the United Kingdom Emission Trading System (ETS) is around US$99. The most recent price in Canada’s carbon market is around $40. It cost $31 in California, the United States. Meanwhile, the price is lower in China and Tokyo, where it is around US$9 and $4, respectively. The price variations are due to the various frameworks and rules used for the carbon credit schemes.

How Do Carbon Credits Lower Emissions?

Essentially, the government determines the maximum amount of greenhouse gases that corporations can emit per year (this cap is lowered over time, allowing companies to reduce their carbon emissions slowly). Through industry reliance on consuming fossil fuels (such as gasoline and coal) and anticipation of future changes, the government’s yearly cap drives the market for carbon credits. The government then distributes these credits to businesses.

This is where things get interesting. Companies that emit more greenhouse gases than they are permitted to emit must pay higher taxes. To avoid paying those taxes, they must either reduce their emissions or purchase carbon credits.

But where can they get them if the government has already distributed the year’s carbon credits? If forward-thinking businesses can reduce their emissions sufficiently, they can sell their carbon credits to other businesses.

Frequently Asked Questions

Now that you know how to invest in carbon credits, here are a few common questions you might have on your mind.

Are Carbon Credits a Safe Investment?

A risk-free investment does not exist. You can estimate potential risk based on how an industry performs, but you can’t guarantee the outcome.

Carbon credits, when compared to other investment opportunities, have the potential to be riskier. The reason for this is that the market is new and small. We don’t have years of market performance to consider, so the market’s future is entirely speculative. While it has been an extremely profitable market for investors, we have no idea where it is headed.

On the other hand, environmental awareness is gaining traction in ways it has never before. The market appears to be promising, with non-profits, corporations, and government agencies investing time and energy in green solutions and programming.

Any market investment is a risk. Conduct your research and make an informed decision about what is best for you and your investment portfolio.

What’s a Beginner-Friendly Carbon Credit ETF?

KRBN is an excellent carbon credit ETF in which to invest. The strategy of this ETF is to invest in companies that have signed the Paris Agreement. Each has pledged to reduce greenhouse gas emissions, resulting in a robust collection of climate change stocks.

This approachable option makes it simple to invest in carbon credits indirectly.

Is Investing in Carbon Credits Expensive?

You can find a variety of different investment opportunities to meet your needs in the market, just like in other markets. If you don’t have much money, ETFs and mutual funds are a great place to start. You can start diversifying your portfolio and supporting a greener future for the price of a share.

Why Is It Important to Invest in the Environment?

We live in a world where climate change is becoming a more serious threat, so it’s understandable that people want to make a global impact with their investments. Carbon credits and carbon offsets are excellent ways to accomplish this, with options ranging from carbon credit futures to carbon offset ETFs.

What Are the Limits of Carbon Credits?

Carbon credits and their cap-and-trade marketplace are still limited in their scope. National and state governments maintain the system by setting the cap and decreasing it over time. Companies sell unused carbon credits and some, like Shell, use the resulting cash flow to fund green projects.

Individuals can’t buy carbon credits directly. Carbon offsets are more accessible to individual investors.

Carbon offsets work by proactively offsetting greenhouse gas emissions, which they trade with climate change-conscious organizations. Some examples of carbon offset projects are protecting trees and building renewable energy sources.

Conclusion

Carbon credits are an excellent investment if you want to reduce your carbon footprint while also helping the environment. Carbon credits are financial instruments that allow businesses to offset their carbon footprint by purchasing carbon offsets. The higher the cost of your carbon offset, the higher your emissions will be. Carbon credits can be purchased and sold on the open market, making them an appealing option for investors looking to profit from their environmental impact.

Carbon credits are a market-based method of offsetting greenhouse gas emissions. While this type of public market approach, which operates in both voluntary and regulated modes, does not yet exist, there are still some avenues through which you can invest if you so desire. You can trade futures individually or you can buy funds that trade carbon credit futures.