How to profit from trading carbon credits

Carbon credits are being traded all around the world by companies to meet environmental emissions targets, individuals looking to decrease their personal emissions, and investors looking to profit from the carbon market boom whilst helping the environment.

This is now big business. According to the latest report from the World Bank, the global carbon trading market is now worth a phenomenal US$144 billion.

So what are carbon credits and how can they help? Each carbon credit represents one tonne of CO2; creating a way of monetising greenhouse gases. Each carbon credit bought puts money into a project that is verified to reduce greenhouse gas emissions, and can then be sold to companies who need to reduce emissions to comply with global targets, or to individuals who want to reduce their emissions.

The opportunity to trade carbon credits was created by the United Nations’ Kyoto Protocol, a legally binding document committing countries to efforts for the reduction of greenhouse gases (GHGs). The treaty created a number of emission reduction targets that nations needed to meet to safeguard the environment. Collectively, industrial nations agreed to reduce their GHGs by 5.2% from 1990 levels. On an individual country basis, this ranges from an 8% reduction in the European Union to 6% for Japan, 0% for Russia, and an increase permitted of 8% for Australia and 10% for Iceland. These countries are now responsible for ensuring that companies, and the governments themselves, are reducing GHGs.

To facilitate this, the Kyoto Protocol gave GHGs a value, known as a carbon credit. Each carbon credit is equivalent to one tonne of CO2. If a company has emissions over its allowance, then this entails a cost.

Private investors, through a carbon credit broker, can get access to these credits on exchanges, and trade rising demand for credits to make  a profit and to channel funds into these projects, helping them grow.

This boom has meant increasing interest from investors, who usually trade stocks and shares. Is it worth these investors diversifying their portfolio to trade carbon credits? What are the upsides and downsides to either?

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