The Paris Agreement aims to enable countries to trade carbon credits to reduce greenhouse gases. This is done through Article 6.4, which allows countries to buy and sell credits from other countries that have achieved emissions reductions through certain activities. Once the mechanism is in place, a UN supervisory body, composed of 12 members from the parties to the Paris Agreement, will be created to set standards for qualified Article 6.4 activities, accredit operational entities and certify the activities. However, there are a number of challenges. As the process for establishing a supervisory body is still in the early stages, and methodologies for measuring emissions reductions have not yet been created, actual carbon credit trading is likely to be years away.
Fairtrade carbon credits
Fairtrade carbon credits are a way for businesses to reduce their carbon footprint and contribute to climate action. Each credit represents one tonne of carbon dioxide removed from the atmosphere. These credits are available for purchase by both individuals and organisations. Fairtrade works with participating coffee producers to reduce their carbon footprint by implementing simple solutions like energy efficiency and water filtration.
Carbon credits from Fairtrade projects are higher quality than those from regular sources. Fairtrade also demands that farmers use the Fairtrade Premium from each credit they sell to invest in climate change adaptation activities. Fairtrade carbon credits are certified by the Fairtrade International.
Voluntary emissions reduction (VER)
BNP Paribas has an established presence in the carbon emission markets and has invested in developing origination capabilities in carbon offset markets. It recently shared a presentation with its clients to help them understand the market and how carbon offsets can help companies address ESG concerns. Today, there are increasing pressures on corporations to embrace sustainability, and the voluntary emission reduction market has the potential to be a useful tool in the quest to reduce carbon emissions.
China National Emissions Trading Scheme (ETS)
The China National Emissions Trading Scheme (ETs) is an ambitious plan for the future of energy in the country. Although it was announced late last year, the scheme has yet to enter into operation. This is likely due to the fact that key regulatory frameworks are still missing. One reason may be the fact that China’s new Ministry of Ecology and Environment (MEE) has not yet had time to come up to speed and determine its mandate.
China’s emissions come mainly from the power sector and industry. Together, these sectors account for over 40% of the nation’s total emissions. Since 2010, China has repeatedly stated that it will introduce an ETS, and in 2014, it made good on its word by confirming its intention to do so in 2015.To participate, companies must submit a permit for each tonne of carbon that they release each year.
Hedge funds
Hedge funds that trade carbon credits aim to make a profit off of climate change. They aim to achieve positive returns of 2-4 times the unlevered price of carbon. They do so by taking long positions in carbon futures and systematically managing tail risks. The fund’s main goal is to provide investors with exposure to the European Carbon Emissions Market.
Hedge funds have a flexible structure that allows them to specialize in a particular area and move quickly to new trends in the market. One area that has attracted a growing number of investors is green investments. One of the newest investment vehicles is the carbon hedge fund, which focuses on this emerging asset class. This article will outline the two most common strategies used by carbon hedge funds and provide resources to learn more about this growing industry.
Singapore
Its existing sectoral schemes and international aviation network make it an appealing destination for carbon trading and decarbonization initiatives. EST has outlined several recommendations to support Singapore’s ambition to become a global carbon trading hub.
First, the government must clarify the tax treatment of carbon trading. The current tax treatment for voluntary carbon credits could negatively affect uptake. While the tax is not a prohibitive amount, businesses must be aware of the tax implications before entering the market. The government should also provide clear tax exemptions to encourage businesses to participate in carbon trading.
