
HomeBiogas 2021 Impact & ESG Report
With a wide portfolio of products, HomeBiogas helps businesses achieve Environmental, Social, and Governance (ESG) Criteria, enabling them to demonstrate their commitment to safeguard the environment.
Read MoreCompanies and individuals can invest in carbon credits, but picking suitable projects and keeping an eye on their performance is not simple. Here's everything you need to know about carbon credits and how to invest in them to build a green portfolio.
Carbon credits are an instrument that helps governments to limit greenhouse gas emissions. Regulatory authorities limit various industries and states on how much carbon dioxide they can produce in a given year. Then governments and independent bodies emit credits to satisfy that limit. Every carbon credit works as an authorization to emit one ton of carbon dioxide or carbon dioxide equivalent.
This system is part of an international agreement known as the Kyoto Protocol, which would set carbon emissions for all participating countries. Credits are given to companies in a fixed number that decreases over time. If the companies’ carbon dioxide emissions fall below the predetermined limit, they can sell the extra credits to other businesses that require them to offset the damage.
These credits can be bought, sold, and traded between businesses. A company can purchase enough carbon credits to enable it to keep producing greenhouse gases up to a predetermined level. On the other hand, businesses that actively lower the quantity of carbon in the atmosphere through negative emissions (such as forestry programs) produce carbon credits that can be sold for a profit.
As in all markets, credits become more expensive when there is a greater demand for them. Therefore, companies have a tremendous incentive to save costs by reducing emissions through trading. By 2050, the globalized carbon trading market might be worth up to $22 trillion.
Carbon credits are part of a “cap-and-trade” system — an effective way to put a price on carbon emissions and limit them simultaneously. The rigid limits make the cap on greenhouse gas emissions, while the trading component creates a market where businesses may purchase and sell permits.
Theoretically, all businesses and individuals can freely trade carbon credits. However, things are a bit more complex in practice. Although California and a few Northeastern states have small credit programs for their power grids, the US government doesn’t implement a carbon credit system.
Things are a little more advanced in Europe, but the system is still closer to a theoretical concept than traditional trade. The European Union Emissions Trading Mechanism regulates carbon credits that can be traded in a limited market and through a government-based auction system.
It doesn’t mean you can’t invest in carbon credits. Traders and investors have three ways to get into the carbon market and build a “green” portfolio:
Carbon credits are intangible assets sold on the market similarly to stocks and bonds, similar to financial instruments. To trade them, you need a brokerage account or an investment app.
Carbon-credit ETFs (exchange-traded funds) are traded on an exchange, similar to stocks. They’re bought and sold on the market throughout the trading day, so their prices fluctuate.
Carbon ETFs to watch:
Futures are most frequently used by individual investors and traders who want to speculate on how carbon credit prices will change in the future. In a typical futures contract, one party commits to purchasing a specified amount of carbon credits to take delivery on a specific date. The contract’s selling party consents to deliver it.
It’s a more advanced form of trading, less accessible than carbon-credit ETFs for beginners.
If ETFs and futures aren’t appealing to you, another way to invest in carbon credits is by investing in companies that trade carbon credits. In 2021, Delta Air Lines purchased 12 million carbon credits for $137 million, for example. Besides fleet replacement, operational enhancements, and sustainable aviation fuel, the company invests significant amounts in carbon offsets to reach its emissions goals — $1 billion in carbon credits in the next ten years.
Investors can buy carbon credits directly from developers, brokers, or a dedicated marketplace.
Benefits of investing in carbon credits:
Cons of investing in carbon credits:
1) The environmental benefit
When buying a carbon credit, assess the environmental additionality of the credit — how the project that generates the credits impacts the environment. It’s essential to support initiatives that wouldn’t have occurred without the projects that create the credits to truly make an impact and reduce greenhouse gas emissions from the atmosphere.
Carbon credits are usually created under market standards regulated by international organizations, such as World Wildlife Foundation, the United Nations Framework Convention on Climate Change, the Climate Community and Biodiversity Alliance, or the International Carbon Reduction and Offset Alliance.
Buy carbon credits issued under an Emissions Trading Scheme or standards recognized by the international community to ensure there’s an environmental benefit tied to your investment.
2) The relevance to your company
Choose carbon credits with solid ties to your business and corporate activities. Most companies use a strategic, geographical, and supply chain perspective to evaluate how carbon credits match their business models.
If you invest in carbon credits to compensate for your emissions, go for projects that make sense geographically to serve the same communities that your actions can impact.
It’s important to note that many markets experience a lack of established guidelines or laws that businesses must abide by when initiating projects that can generate carbon credits. In other words, any company can claim to be sustainable to draw in investors, so significant research is required to preserve brand reputation.
3) The type of project
Projects that generate carbon credits can be divided into two categories:
Each type of project has pros, cons, and maintenance costs that must be considered before investing to increase efficiency and build a socially responsible organization.
Many carbon-credit ETFs have seen price increases over time. However, they continue to be volatile, and the value of your portfolio may fluctuate over time. Therefore, exercising patience while keeping an eye on your investment is crucial.
Here are four metrics to help you monitor the health of your portfolio:
Carbon markets can be mandatory (compliance) systems or voluntary.
Compliance carbon markets (also known as Emissions Trading Systems—ETS) result from national, regional, or international carbon reduction programs that also regulate transactions. Companies purchase or sell carbon credits in line with governmental restrictions depending on the emissions produced.
The most known emissions trading systems operating are:
The voluntary carbon markets operate independently of compliance programs and let people, businesses, or governments trade carbon offsets. They can be crucial to reducing global warming.
The private sector purchases the majority of voluntary credits. Most often, corporate social responsibility objectives are the primary motivators.
Carbon markets work, and more companies have begun to see the benefits of using carbon credits to balance their carbon footprint. It’s a way to consolidate a company’s reputation as an entity interested in corporate social responsibility — a business close to reaching “net-zero emissions of greenhouse gases.”
It helps businesses become more “green” and speed up their transition toward “net zero” by adopting techniques for capturing carbon dioxide from the atmosphere and lowering emissions generated through their operations.
With carbon credits and offsets, organizations can make up for their operations’ climate impacts when they cannot directly reduce carbon emissions.
What started with the EU’s innovative Emissions Trading Scheme is now becoming a global phenomenon. Governments worldwide are concluding that carefully planned market-based mechanisms are the most effective way to reduce emissions. Nations like China, the US, and South Korea have become more aware of the need to find solutions to climate change, encouraging this way the expansion of global carbon markets.
Green (sustainable) companies aim to balance profit and the earth’s welfare. Businesses in this category provide a wide range of services and goods and value ethical and sustainable business practices. They pay particular attention to how their activities affect the environment and follow environmental, social, and corporate governance standards — often called ESG.
Customers who care about the environment prefer to buy from sustainable companies and invest in stocks with high ESG ratings. Corporate sustainability policies have become essential for organizations that want to grow while investing in proactive and sincere remedies to environmental problems.
Among the factors that influence the development of green companies, the most important are:
Companies are expected to have obligations to stakeholders like employees, consumers, communities, and the environment in addition to making profits. They must become socially and environmentally conscious of the need to reduce environmental harm and support their communities.
Investing in carbon credits can be risky, so you must keep an eye on the market to learn as much as possible about the project that generates the carbon credits before buying. You want to support initiatives that are aligned with your business model and make a true impact on the environment. Working with a broker can simplify your decision-making process, especially when starting with carbon credits.
With a wide portfolio of products, HomeBiogas helps businesses achieve Environmental, Social, and Governance (ESG) Criteria, enabling them to demonstrate their commitment to safeguard the environment.
Read MoreAt HomeBiogas, we are taking responsibility for our planet together with our customers. They are visionaries, changemakers and inspiring people creating a positive future for us all. We are thankful to our wonderfully courageous customers, and we are proud to share their stories.
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