Net Zero targets have become common in recent years… but this is just the first step. Becoming 100% carbon neutral simply isn’t realistic for most companies and countries, at least not yet. In the meantime, carbon credits exist to make up for the shortfall, allowing carbon emitted in one context to be offset elsewhere.
The carbon credit market is split between the Compliance Market, catering to those that are legally required to offset their emissions, and the Voluntary Carbon Market (VCM), which serves those who wish to voluntarily offset their emissions.
The Compliance Market consists of highly regulated credits that companies with high emissions are legally required to purchase to offset their emissions. Typical customers include energy companies, oil refineries, iron and steel works, and other heavy industries.
The Voluntary Carbon Market (VCM) is for those who wish to offset their carbon emissions but are not legally required to. Companies, countries, and organisations that have made Net Zero pledges rely on the VCM to help them achieve their green goals. It’s also great for individuals that want to personally account for their carbon footprint.
At Likvidi, we operate in the Voluntary Carbon Market. It’s our mission to tokenize carbon credits bringing the benefits of speed and transparency to the industry.
How to put a price on carbon?
In the Compliance Market, mechanisms have been put in place to encourage a high and steadily increasing price of carbon. This can take the form of a ‘Cap and Trade’ system, where a fixed amount of GHG emissions are permitted and companies may buy and sell the right to emit. In some cases, the total amount permitted is reduced each year, further limiting emissions. Another method is to use a ‘Carbon Tax’, charging emitters directly for what they release into the atmosphere.
In the Voluntary Carbon Market however, no such mechanisms exist. It’s vital though, if we’re to reduce emissions significantly in the long term that the price of carbon offsetting increases. According to leading economists Joseph Stiglitz and Lord Nicholas Stern, the price of carbon must increase to around $50-$100 per tonne if we’re to keep within the 2°C set by the Paris Climate Accords.
By putting carbon credits on a decentralised exchange, we’ll encourage the price of carbon credits to increase. As offsetting becomes more expensive, this should shift the financial calculus for companies, making it financially imperative that they decarbonise in a fundamental way.