Limiting greenhouse gas (GHG) emissions is one of the objectives of responsible or sustainable investing. Carbon markets and carbon credits are tools for achieving this objective.
The following Q&A covers the key aspects of the topic.
- What is a carbon credit?
- Where do carbon credits come from?
- What are the five main classes of carbon assets?
- What can carbon credits be used for?
- Is it possible to invest in carbon assets?
- How do companies offset GHG emissions, including by using carbon credits?
- What is greenwashing?
- Is there a risk of fraud when investing in carbon assets?
1. What is a carbon credit?
A carbon credit is an assetThe assets of a person or a company are everything that belongs to them. These assets may be tangible (such as a computer or a building) or intangible (such as patents, trademarks or copyrights).
Assets are the opposite of liabilities, which represent the debts of the person or company. representing an emissions reduction or the removal from the atmosphere of one metric tonne of greenhouse gas (GHG). The reduction is generated by a carbon offset project.
e.g., destroying landfill methane or planting trees to remove GHG from the atmosphere by sequestering carbon in vegetation.
2. Where do carbon credits come from?
Carbon credits may be issued by governments or public or private bodies as a means of reducing GHGGHG means “greenhouse gases.” They trap heat near the Earth’s surface. and fighting climate change. Several carbon markets have been set up for the purpose of trading these assets, including in Québec, Western Europe, a number of U.S. states, New Zealand, South Korea and China.
Québec established a regulated carbon market in 2013, making it a pioneer in the sector. The system caps the amount of GHG that can be emitted by companies that are subject to it. To ensure that they adhere to the cap, the companies must obtain emission unitsGreenhouse gas emission units represent a right to emit one metric tonne of GHG. They are sold at auction or offered by the Ministère de l’Environnement et de la Lutte contre les changements climatiques. The revenue from these auctions is used to fund GHG emission reduction measures. or regulated offset creditsRegulated offset credits are offset credits that are strictly regulated by governments, which publish lists of sectors and activities for which regulated offset credits may be issued. These offsets are different from voluntary offset credits. for the amount of GHG they emit. Emission units and regulated offset credits are two of the five main classes of carbon assets.
3. What are the five main classes of carbon assets?
There are two types of emission allowances that companies can use to adhere to their GHG emission cap:
- Emission units
- Regulated offset credits
There are two types of carbon credits:
- Regulated offset credits
- Voluntary offset credits
Note that the term “carbon credit” refers to both regulated and voluntary offset credits. Make sure you check which type of credit is being presented to you.
The following explains what emission units, regulated offset credits and voluntary offset credits are.
An emission unit represents a right to emit one metric tonne of GHG.
Four times a year, the Ministère de l’Environnement et de la Lutte contre les changements climatiques (Ministère de l’Environnement) sells GHG emission units at auction. Bids must be equal to or above the minimum price set by the Ministère de l’Environnement, and the quantity offered is limited. The revenue from these auctions is used to fund GHG emission reduction measures.
Each time there is a sale of units, the Ministère de l’Environnement increases the minimum price and decreases the maximum quantity of GHG emission units. The higher the price, the more companies have to pay to emit GHG, incentivizing them to reduce their GHG emissions. This is the main objective of the regulated carbon market.
Companies facing national and international competition receive a certain number of GHG emission units free of charge. The Ministère de l’Environnement gradually lowers the number of units over time to encourage those companies to take further action to reduce emissions. Companies that keep their GHG emissions below the allocated quantity of free units are allowed to sell the surplus units on the carbon market.
The Ministère de l’Environnement also allows companies to offset part of their GHG emissions by buying offset credits.
A regulated offset credit represents an emissions reduction or the removal from the atmosphere of one metric tonne of GHG. Such credits are strictly regulated by governments, which publish lists of sectors and activities for which regulated offset credits may be issued.
Regulated offset credits may be purchased by GHG-emitting companies and individual investors. In Québec, the Ministère de l’Environnement publishes a list of companies and investors that are registered for the carbon market, and any buyer or seller of carbon emission units or regulated offset credits must be registered to sell or purchase credits on the carbon market. The Ministère de l’Environnement also publishes the Register of Offset Credit Projects This link will open in a new window.
If you have any questions about purchasing emission units or regulated offset credits, please contact the C&T System (cap-and-trade system) Registrar.
C&T System Registrar
Carbon Market Division
Ministère de l’Environnement et de la Lutte contre les changements climatiques
675 René Lévesque Blvd. East, 5th Floor, Box. 30
Québec City, QC G1R 5V7End of the insight
A voluntary offset credit also aims to represent an emissions reduction or the removal from the atmosphere of one metric tonne of GHG. However, such credits are not government-regulated and cannot be purchased on regulated markets. They come from programs created by private initiatives.
These credits are based on GHG emission reduction or removal projects. They are generally purchased by members of the public or companies seeking to voluntarily offset their emissions. A company can’t use these credits to adhere to its GHG emission cap required by regulation This link will open in a new window in Québec.
Before buying any voluntary offset credits, check their quality. The value of a voluntary offset credit is based, first, on the credibility of the program that generates the credit and how much demand there is for it. Purchasing a voluntary offset credit isn’t an investment per se: It is an expression of the purchaser’s desire to protect the environment and help fight climate change by voluntarily offsetting their emissions (buying voluntary offset credits to offset air travel, for example).
Those credits generally follow voluntary standards that differ from the standards used for regulatory offset credits. Voluntary offset projects are usually listed in a project registry. The following are the best-known voluntary offset programs and registries in Canada and North America:
- GHG CleanProjects (Canadian Standards Association) This link will open in a new window
- Gold Standard This link will open in a new window
- Climate Action Reserve This link will open in a new window
- American Carbon Registry This link will open in a new window
A voluntary offset credit can’t be traded for a regulated offset credit
Regulated offset credits are different from voluntary offset credits and one can’t be substituted for the other. They have different values. Similarly, regulated offset credits from one part of the world often cannot be traded for regulated offset credits from another part of the world unless the jurisdictions involved have entered into an agreement for that purpose like the one that exists between Québec and California as part of the Western Climate Initiative (WCI).
End of the warning
4. What can carbon credits be used for?
Carbon creditsA carbon credit is an asset representing an emission reduction or the removal from the atmosphere, generated by a carbon offset project (e.g., destroying landfill methane), of one metric tonne of greenhouse gas (GHG). The term “carbon credit” can refer to both regulated offset credits and voluntary offset credits. Make sure you check which type of credit you are dealing with. can affect your investment decisions in a number of ways. They can also be used as a means to participate in the fight against climate change. For example, you could:
- Invest in a company or investment fund that buys them either to offset its carbon emissions or as an investment for profit;
- Invest in regulated offset credits directly or through derivativesA derivative is a financial product whose price fluctuates based on the price of an underlying interest, such as shares, an index or another financial product. ;
- Invest in a company looking to reduce the amount of carbon in the atmosphere;
- Offset your carbon emissions by buying and cancelling (retiring) carbon credits.
Choose the right carbon credit
Remember: In order to invest, you must choose a “regulated offset credit,” not a “voluntary offset credit.” The only thing a voluntary offset credit does is let you participate in the fight against climate change.End of the insight
5. Can I invest in carbon assets?
Yes, you can invest in GHG emission units and regulated offset credits. These assets are considered commodities. Using them as investments carries some risk. Their value varies according to:
- Annual emissions caps, which are dependent on a government’s GHG emission reduction targets;
- Emitters’ emission levels and ability to reduce their GHG emissions;
- Type of regulated offset project, how stringent the rules governing such projects are and overall supply and demand for regulated offset credits.
Regulated markets are also affected by the determination of governments to uphold the market rules whatever the circumstances.
Many countries have exchanges for the trading of GHG emission allowances or regulated offset credits. Some exchanges permit the trading of emission allowance derivativesA derivative is a financial product whose price fluctuates based on the price of an underlying interest, such as shares, an index or another financial product. (optionsAn option grants the right to buy (call option) or sell (put option) an asset at a fixed price for a specified period.
The asset, called an underlying interest, may be a common share, a commodity, a currency or an index (such as a stock market index). , forwardsThere are two types of contracts: futures and forward contracts.
In both cases, the parties involved assume a legal obligation to buy or sell a specific quantity of an asset (such as oil, wheat or financial products such as a stock market index) at a predetermined price and date.
The characteristics of futures are selected by the exchange. A clearing house acts as an intermediary between the buyer and the seller and ensures compliance with the contract terms, so there is no counterparty risk. Conversely, the characteristics of forward contracts are selected by the parties who sign these contracts. In general, there is no clearing house involved to guarantee the credit of the parties involved. The parties involved can therefore choose the contract maturity date, its duration, the quantity of the asset delivered, the place of exchange, etc. ). Québec’s carbon market is regulated by the Ministère de l’Environnement. It is linked to California’s carbon market, and all emission allowances are entered in the Western Climate Initiative (WCI) electronic registry. Exchanges, such as the Intercontinental Exchange in the United States, offer derivatives on GHG emission units or regulated offset credits.
GHG emission units and regulated offset credits may also be included in some investment funds with the aim of:
- Generating a profit by reselling their GHG emission units or regulated offset credits at a higher price than they acquired them for;
- Offsetting their emissions by buying or retiring (permanently removing) allowances—a fairly rare occurrence.
6. How do offset GHG emissions, including with carbon credits?
While you can shrink your individual GHG footprint by doing such things as composting, carpooling, eating local and limiting travel, it is difficult, if not impossible, to eliminate it completely.
However, you can also offset your GHG emissions by helping to reduce the emissions of other entities, such as companies, organizations and governments. You can also pay a company to have it offset some or all of your GHG emissions. In practice, this is done by buying and retiringQuébec regulated offset credits can be retired. For more information, contact the C&T System Registrar by phone at 418-521-3868, ext. 7074, or 1-800-561-1616, ext. 7074, or by e-mail at [email protected]. You could also decide to invest in a GHG reduction project but without the expectation of receiving carbon credits in return. carbon credits. This means you could be carbon neutral.
Simply put, being carbon neutral means striking an equal balance between your GHG emissions and your actions to reduce the GHG emissions of other entities. You can do this by acting on both sides of the scales:
Even companies, investment funds, organizations and governments may want to reduce their GHG emissions and become carbon neutral.
Offsetting your GHG emissions isn’t the same as investing
Offsetting your GHG emissions takes more than just purchasing carbon credits. You have to retire them. Alternatively, you could resell them. Whether you earn or lose money on the sale, doing this is tantamount to transferring the GHG emission reduction to the buyer, with the buyer being able to use the credits to offset their own GHG emissions.
Offsetting your GHG emissions by buying and retiring carbon credits therefore has a cost. When you retire the carbon credits, you lose the credit you bought. On the other hand, instead of offsetting your own GHG emissions, you’re paying a company to offset some or all of your emissions.End of the insight
Offsetting your GHG emissions or going carbon neutral doesn’t mean investing in the energy transition or in sustainable finance by putting money into an ESG, green, renewable energy or carbon investment fund. It doesn’t mean investing in an offset project, either.
7. What is greenwashing?
Greenwashing is a form of marketing that misrepresents a product, service or practice as having positive environmental effects, such as a company claiming to be carbon neutral when it isn’t.
8. Is there a risk of fraud?
Be wary of calls from people you don’t know who want you to help save the planet by buying GHG emission credits or offset credits. They may promise you big returns in exchange for investing in a project. It could be a scam. Before investing, do your homework:
- Check if the credits are for a regulated or a voluntary offset project This link will open in a new window. This information is available to the public. If the project is in a regulated offset program of the Ministère de l’Environnement, you can check with the C&T System Registrar. If it is not, assume that the project is not regulated by the government.
- Check if the person has already completed several carbon reduction projects and if they were carried out with known companies or organizations you can check with.
- Check if the project was certified by a specialized third-party verifier. You may contact the verifier to validate information.
Remember that every investment carries risks.
Text based on information obtained from the Ministère de l’Environnement et de la Lutte contre les changements climatiques This link will open in a new window.