The carbon credit market enables organizations to offset their unavoidable emissions by purchasing credits from entities that reduce or remove greenhouse gasses. One tradable carbon credit represents one tonne of CO2e (carbon dioxide equivalent) that has been reduced, sequestered or avoided. Companies with ambitious climate targets rely on this market to meet them and stay below their regulatory emission cap.

The number of different projects issuing carbon credits in the voluntary market is enormous – and so are the number of variables that can influence each credit’s price. These include the type of underlying technology (such as renewable energy, clean cookstoves or forestry), the size of the project, the geography, the vintage of the project (the year in which it was issued), and the certification body. The fact that some carbon projects also deliver a wider range of social benefits, helping to address the UN’s Sustainable Development Goals, can make them more desirable or less desirable to end buyers – and this can impact their price as well.

These factors can lead to significant volatility in the prices of carbon.credit exchange – and the uncertainty that comes with it, which in turn makes putting a price on carbon credits challenging for both traders and suppliers. Exchanges have tried to simplify and speed up the process of trading – and thus pricing – by creating standard products. However, end buyers that are looking for carbon credits to offset their own emissions often prefer non-standardized products so they can look into the specific characteristics of each underlying project and ensure they’re getting what they want.

Despite the challenges, there is a clear demand for the carbon market to scale up further. Increasing the amount of capital flowing into the market can help drive liquidity and supply and improve the credibility of claims made by companies that use them to meet their climate targets. And a credible, large and efficient voluntary carbon market can play an important role in supporting the transition to net-zero and positive emissions targets.

In order to achieve this, we need a global standardization and verification process that creates reliable, consistent and comparable information on the true price of carbon. This would allow players to understand and price the different types of carbon credits in a more accurate way, and thus create the conditions for a healthy, dynamic carbon market that supports companies in their efforts to reach their climate goals.