August 11, 2023

How are carbon credits priced?

Learn about the different factors that influence carbon credit prices from additionality to leakage.
The Green Standard is written by our team of experts with the mission of simplifying carbon investing for everyone. Start investing with WealthGreen

Imagine the Earth as a giant neighborhood with different types of properties, like forests, wetlands, and grasslands. These natural “natural real estate assets” can help us fight climate change by absorbing carbon dioxide, just like how a good home shields you from bad weather. Similarly, just like any other property, each natural real estate asset is unique. It may be a forest in Canada, a grassland in Argentina, or a mangrove in Thailand. Just as you'd pay different prices for a house in New York City, a cabin in the woods, or an apartment in Paris, the value of these natural real estate assets also varies. This value is determined by several factors, which also play a role in the pricing of carbon credits they can generate.

  1. Additionality: Imagine someone buys a vacant plot and builds a park that improves the neighborhood. In the carbon credit world, this is like making sure that the project is doing something extra to reduce or absorb carbon dioxide, which wouldn't have happened without the project. More valuable projects bring something new to the table and make a real difference in reducing carbon.
  2. Methodology: This is like the blueprint of a house. It’s the way we measure how much carbon is being absorbed or reduced by the project. Some blueprints (or methodologies) are more trusted and might be seen as more valuable. So, a carbon credit coming from a project with a well-respected blueprint might fetch a better price.
  3. Geopolitical Risks: Some areas might have political issues or conflicts. Just like how houses in stable neighborhoods usually cost more, carbon credits from projects in stable regions might be more expensive. A project in a conflict zone, where it’s uncertain if the project can continue, might have cheaper credits.
  4. Leakage: Imagine you fix a leak in one part of a pipe only for it to spring a leak somewhere else. In carbon credits, this means that the carbon reduction in one area might cause an increase somewhere else. For example, if you protect a forest in one place, loggers might move to a different forest. Credits from projects with lots of leakages might be worth less because they aren't really solving the problem.
  5. Social Benefits and UN SDGs: If a project also helps the local community, provides jobs, protects endangered animals, or meets the United Nations Sustainable Development Goals, its carbon credits might be worth more. Think of it like a house with a community center, or near a great school – it’s going to be worth more.
  6. Permanence: This is about how long the carbon stays out of the atmosphere.Planting trees is great, but if they’re cut down in 10 years, that’s not as good as trees that stay for 100 years. It’s like comparing a house built to last versusone that won’t make it through the next storm. Credits from projects with more permanence are often worth more.
  7. Certification Standards: Some carbon credits are certified by well-respected organizations. This is like having a quality stamp or warranty on a product. These certifications can include checks on how the project is run, andwhether it really does what it says. Certified credits can often sell for a higher price because buyers trust them more.
  8. Supply and Demand: Like anything else, prices for carbon credits are also influenced by how many people want them (demand) and how many are available (supply). If a lot of companies want to buy carbon credits to offset their emissions but there aren’t many credits available, prices will go up.
  9. Co-benefits: Sometimes a project might have additional environmental benefits like improving water quality or restoring habitats. This is like a house that not only looks good but also has solar panels and a rainwater harvesting system. Carbon credits from projects with co-benefits might be more valuable.
  10. Legal and Regulatory Environment: Different countries have different laws and regulations regarding carbon credits. In some places,companies are required to offset their emissions, which might increase demand for credits. Inother places, there might be tax benefits or subsidies for carbon offset projects. The legal and regulatory environment can influence both the supply and demand for carbon credits.
  11. Project's Reputation and Credibility: If a project has a track record of success and transparency, or if it’s backed by organizations with a strong reputation, this can increase the value of the carbon credits it generates. Conversely, if a project is associated with controversy or has a history of under-delivering, this can devalue its carbon credits.
  12. Time Value of Carbon Credits: Older credits may be considered less valuable than newer ones. This is because the benefit to the atmosphere of a ton of carbon sequestered in the past is considered to be less than a ton sequestered now or in the future. It's similar to the concept of money losing value over time due to inflation.
  13. Technological Innovations: As technology evolves, newer and more efficient methods of carbon sequestration or emission reductions might emerge. This can affect the value of carbon credits. For example, if a new technology emerges that can capture carbon from the atmosphere more efficiently than planting trees, the value of credits from tree-planting projects might decrease.
  14. Investor Perception and Corporate Goals: The perception of investors and corporate sustainability goals can also influence the price. For example, ifthere is a trend among investors to favor projects with social co-benefits, thencredits from such projects might see a price rise. Similarly, if a company has set ambitious sustainability goals, it might be willing to pay more for credits that align with its objectives.
  15. Currency Fluctuations and Economic Conditions: Since carbon credits are often traded internationally, fluctuations in currency exchange rates can affect their price. Additionally, broader economic conditions such as recessions or booms can influence the demand for carbon credits and, consequently, their price.

The pricing of carbon credits is influenced by a multitude of factors including the project's additionality, methodology, geopolitical risks, leakage, social benefits, permanence, certification standards, supply and demand, co-benefits, legal and regulatory environment, project reputation, time value, technological innovations, investor perceptions, and economic conditions.

While this may seem like a lot, at WealthGreen, we understand the complexity involved. To streamline the process, we employ third-party ratings groups in addition to our AI model to meticulously vet these carbon assets. This guarantees that only top-tier carbon credits are available for investment on WealthGreen. Start here today