There are many ways to value a carbon credit, whether using market dynamics, basing it on the cost of implementation, or the value that the project delivers. Pricing can also vary by project type, size, location, and other determining factors.
The chart above shares a basic snapshot of the pricing of various types of credits within the marketplace.
The World Bank, who compiles a yearly report on carbon credit pricing in the carbon marketplace, also noted the following:
- Most prices of carbon credits are below the $40-80 per metric ton of carbon dioxide emitted needed to keep global warming within a 2-point degree, as provided by the Paris agreement.4
- Higher prices are required to achieve global emission targets.4
- Important to note, however, is that due to the current pandemic, some jurisdictions delayed reporting on price increases.4 The figures may change once all nations send in their data.
To make sense of the figures, we need to understand how the prices of carbon credits are determined. In the following sections, you will learn the process of determining the prices of carbon credits.
Keep reading to find out how you can ensure you pay the correct prices for your credits…
How Prices of Carbon Credits are Determined
There are two main ways of determining the prices of carbon credits, namely:
- Internal pricing
- External pricing
The first option works for organizations that set internal carbon credits prices to guide their investment decisions.3 Such carbon offset companies have their internal mechanisms of determining carbon credits prices based on various factors, which will be discussed later.
On the other hand, external pricing is fixed primarily by the market forces of supply and demand.2 Additional factors that influence external pricing include existing regulations and international climate change protocols.
Internal Pricing of Carbon Credits
As noted earlier, companies who want to use their predetermined internal prices to guide their investment decisions use this option. The organizations can either use shadow prices or internal carbon fee rates to fix the prices of credits.
The first option, using shadow prices, will have organizations compute their emission activities’ prices and use them as the basis for making investment decisions.3
While setting the prices is complex, it is the only viable way for large organizations with substantial financial commitments to protect their investment. A good example is the World Bank, which has set up shadow carbon prices that it uses when making investments in the carbon trading marketplace.
The second option, internal carbon fee rates, entails charging organizational units a fee that accounts for their emission activities.2
The sums collected from applying the fees are used to determine the base prices for procuring credits in the market. This option is much simpler than the first, as it entails applying a constant rate instead of engaging in complex calculations… but is less accurate.
External Carbon Credit Pricing
This approach to determining the prices of carbon credits is controlled by the market forces and the overall regulatory environment. Typically, pursuers of this option have three alternatives to consider:
- Emission Trading Schemes
- Crediting mechanisms
- Carbon tax
The first alternative, Emission Trading Schemes, is the most widely adopted. Also termed a cap and trade system, the choice entails first having governments set the maximum emissions limit for an industry.
Next, carbon credits are issued to the market based on the preset limit, giving companies the right to emit but within prescribed limits. The finance from such credits goes directly into emission reduction activities.
The second alternative, Crediting Mechanisms, is slightly different from the first. It entails determining emissions from a set of activities, then assigning the activities credits to ensure the availability of finance to offset the emissions.2
These credits are sold and traded in the carbon marketplace. Organizations keen on offsetting emissions can then look for projects related to their firms and purchase the credits.
The last option, carbon tax, entails setting a base price for greenhouse gas emission reduction activities. Companies releasing emissions can then buy credits at the rates set per unit of carbon dioxide emitted into the atmosphere. This option is preferred because the prices charged are stable and fixed.2 Unfortunately, it isn’t easy to verify the reality of emission reduction activities with this option.
Pricing Variations by Type of Project
No matter which of the main methods a provider chooses to price their credits, there are still variances, such as the type of project, that play a factor. While all projects must deliver impacts in sustainability or emissions mitigation, different project types provide different levels of benefits.5
For example, a large-scale wind energy project in Switzerland provides more country-level benefits, like local employment, better access to clean technology, and more energy independence. On the other hand, an improved cookstove project in Kenya benefits people more at a community level.
The improved stoves decrease indoor air pollution, which then improves health. It also means less wood required for heating, which saves trees from being deforested and families from having to spend more money and time… which in turn provides more opportunities for schooling and other beneficial activity.5
Even though the sustainable benefits delivered by wind projects are still important, the carbon credits from cookstove projects will sell at a higher price due to the additional values it can provide. The tangibility and direct improvements these benefits give makes many investors feel like they can make more of a positive impact.
Forestry carbon credits work in a similar vein, since their collateral benefits combined with their emissions mitigation potential make an appealing difference. Not only is planting trees one of the only ways to actually remove pre-existing carbon dioxide from the air, but these projects also:6
- Provide habitats for endangered species
- Improve and clean the water supply
- Prevent flooding and erosion
- Restore the balance of ecosystems
- Combat deforestation and wildfires
- Provide local income and food sources
Other Considerations of Carbon Credit Pricing
Even beyond the scope of the type of project, a carbon credit’s price can vary by the size or location of a project. This is largely due to the factors that go into the cost of actually implementing one of these carbon offset projects.5
In many cases, smaller-scale projects contribute greater positive impacts, but are more expensive to implement and produce less carbon credits… leading to a higher price.
The location can also be a deciding factor, because for some countries or areas, it can be difficult to implement a project due to lack of infrastructure, resources, labor, governmental barriers, or certain high risks. Once again, these areas also tend to be the ones that would have the most impact.
For instance, a project to reforest a remote part of the Amazon rainforest would lead to a plethora of benefits for the environment and Indigenous communities, but the resources, planning, funding, and permissions required to implement this project would all lead to higher credit prices.
Even still, there are factors that aren’t even necessarily related to the project itself that would affect pricing.
One example is economies of scale: the number of credits purchased. A larger corporation that has a significant carbon footprint may benefit from this old economics rule. Depending on the provider, they may be able to purchase large quantities of credits all at once, for a discounted price, because that revenue would ensure a level of certainty for the project.5
Another such factor would be clear, transparent communication. Many investors are much more willing to buy carbon credits from a provider that will share clear project details, project photography, or other communications that will keep the investor satisfied that they made the right choice.
How to Determine the Right Price to Pay for Carbon Credits
While determining the prices to pay for carbon credits depends on a range of contextual factors, the Natural Capital Protocol offers a concise guide that you can apply when buying carbon credits. The protocol is a framework for decision-making that ensures organizations measure and validate the impacts of their dependencies on natural capital like the environment.1
Applying the framework entails asking four questions:
- What next?
Natural Capital Protocol Framework for Decision Making
The first question, why, seeks to establish a sound justification for any activity affecting natural capital in an organization.1 Here, organizations should identify risks and opportunities that emanate from their dependencies on natural capital.
The second question asks, “What?” It looks at the scope of the organization.1 Here, entities ought to assess the impact of their internal processes on natural capital.
The third question asks, how? It evaluates the costs and benefits of various activities that depend on natural capital.1 Here, organizations should look at their internal activities and weigh the costs and the benefits to the natural environment.
The final question asks what next? It focuses on the way forward.1 This step entails validating internal processes of assessing risks, opportunities, impacts, costs, and benefits to determine the best course of action to take to restore the used up natural capital.
Applying Natural Capital Protocol Decision Framework to Determine the Prices of Carbon Credits
Applying the framework to carbon credits will have both the buyers and sellers follow the four steps when setting prices. Individuals and organizations will start by identifying the risks and opportunities that come from their emission reduction activities.
Risks include climate change impacts such as droughts and floods, while opportunities include improving brand image by engaging in emission reduction activities.
Secondly, individuals and organizations will have to justify their emission reduction activities by looking at their internal emissions. Massive emissions from internal activities will require investing more in carbon credits.
Next, organizations should determine the appropriate prices to buy or sell credits based on their internal activities.
Lastly, individuals and organizations should review the internal process of assessing risks, opportunities, impacts, costs, and any additional benefits of carbon crediting to choose the best carbon credit pricing in the market.
Using Carbon Credits to Fix the Planet
Carbon credits and offsets can be complex, from their induction to their pricing. However, they represent an actual chance to convince businesses and other major players to start investing in something very important… the health of the Earth.
Without the planet’s natural resources and balanced ecosystems, human society could not operate. It is for this reason that, though complex, they present a simple solution: restoring these ecosystems, and preventing further emissions.
With carbon offsets, businesses and individuals alike can not only participate in this relatively new market, but also help to restore diminished habitats for endangered animals, clean the water supply, and remove harmful greenhouse gasses from the atmosphere… slowing down global warming.
Read More About The Carbon Marketplace:
How to Avoid Scams and Pick Verified Carbon Offsets (Guide)
The 4 Little Known Facts to Know Before Buying Carbon Offset
Agricultural Carbon Offsets: Farmers Joining the Voluntary Carbon Marketplace in 2022
Nuclear Energy Credits and the Growing Carbon Marketplace: Where Do They Stand?
How Carbonfund.org and Other Carbon Offset Providers are Changing the Carbon Marketplace
Gold Standard Carbon Offsets: 3 Scientists Review the Voluntary Carbon Marketplace
8 Best GHG Registries Approved For Offsetting Carbon Emissions
Octopus Energy Carbon Offset Review: A Good Choice for Sustainable Power?
Why Some May Think Terrapass Isn’t Legit (Understanding the Carbon Offset Marketplace)
Carbon Removal Offsets: The Most Ignored Problem In The Carbon Credit Marketplace
Carbon Offsets Don’t Work? Learn About Verified Climate Solutions (and More Explained)
The Average Carbon Footprint Per Person Is Rising Fast: Is It Too Late? (10 Ways to Help Now)
Can Planting Trees Be Bad For The Environment? New Stanford Study Explains
Forestry Carbon Offsetting: Tree Planting to Offset Emissions for Companies Going Carbon Neutral
1Capital Coallition . 2021. Natural Capital Protocol. Accessed August 27, 2021. https://capitalscoalition.org/capitals-approach/natural-capital-protocol/?fwp_filter_tabs=training_material.
2Carbon Pricing Leadership Coallition . 2021. How Carbon Pricing Instruments Work. Accessed August 27, 2021. https://www.carbonpricingleadership.org/what/.
3Gold Standard . 2020. CARBON PRICING: Setting an internal price on carbon. Accessed August 27, 2021. https://www.goldstandard.org/blog-item/carbon-pricing-setting-internal-price-carbon.
4World Bank. (2021). States and Trends Carbon Pricing 2021. Retrieved August 27, 2021, from https://openknowledge.worldbank.org/handle/10986/13334
5CARBON PRICING: Why do prices vary by project type? (n.d.). Retrieved August 27, 2021, from https://www.goldstandard.org/blog-item/carbon-pricing-why-do-prices-vary-project-type
6Forestry & Agriculture – Carbon Offset Guide. (n.d.). Retrieved August 27, 2021, from https://www.offsetguide.org/avoiding-low-quality-offsets/vetting-offset-projects/forestry-agriculture/