The Carbon Credit market is split into two sectors; compliance and voluntary.
The compliance market is led by political initiatives that have made it compulsory for businesses to make a suitable amount of purchases to cover damaging emissions produced by their activity. Therefore, it generally refers to large corporations and government institutes. Businesses trading carbon include Barclays, Newedge, E.ON UK, Fortis, Goldman Sachs, Morgan Stanley and Shell.
This type of Carbon trading is referred to as Certified Emission Reduction (CER) and is currently the largest in the market. The credits are provided by Clean Development Mechanisms (CDM) which, broadly speaking, are clustered in South America, Asia and Africa. One CER is equivalent to one tonne of Carbon Dioxide.
“Carbon will be the world’s biggest commodity market, and it could become the worlds biggest market overall" Louis Redshaw - Barclays Capital
However, the voluntary market is also growing rapidly and it is set to increase 3 times more in 2011 than in 2010. This market includes those who wish to reduce their Carbon footprint in order for there to be a cleaner future. For example, individuals wishing to “offset” the Carbon emissions produced by an aeroplane flight may purchase a relevant amount of credits to become “Carbon Neutral”
Demand in the voluntary market is further intensified by those who can see the high potential returns provided by this relatively new commodity. Independent investors are now beginning to build vast portfolios of carbon credits in order to speculate on the projected future growth. In a similar manner, corporations have also been investing heavily in carbon credits outside of compliance directives, as they foresee the expansion of these regimes and wish to assert a competitive advantage.
David Martin is the Managing Director and Owner of Carbon Expert..