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How to Invest in Carbon Credits | Your Step by Step Guide

invest in carbon credits

So you’re considering investing in carbon credits? Smart move. With the threat of climate change looming, many are looking for ways to make their money work double time while saving the planet. If you’re a savvy investor, you might see a glimmer of potential in developing markets. If you’re an eco-conscious business you’re looking after your bottom line and carbon footprint. Whatever your reason, you need a clear understanding of the field before you get started.

If you’re interested in a clear explanation of carbon credits, the cap-and-trade marketplace, and how you can invest in a greener future, you’re in the right place.

In this article, you’ll learn the technical terms you need to know, things to keep in mind as you move forward, and how to invest in carbon credits. Because they’re often lumped together, we’ll also talk about the difference between carbon credits and carbon offsets. Whether you’re an individual investor looking to diversify your portfolio or a business owner trying to understand your responsibilities, you can learn what you need to get started here.

Before we can get into how to invest in carbon credits, let’s take a look at what carbon credits are, how they help lower corporate carbon footprints, and the source of their value.

What is a Carbon Credit?

You can think of a carbon credit as a gift certificate for a service. Any company with a carbon credit has the right to emit one ton of carbon dioxide (that’s equivalent to driving around 2,500 miles). 

Giving corporations permission to emit greenhouse gases might seem counterintuitive, but it makes more sense than you think.

How Do Carbon Credits Lower Emissions?

Basically, the government decides a set quantity of greenhouse gases that corporations can emit per year (this cap is lowered over time, allowing companies to reduce their carbon emissions slowly). The government’s yearly cap drives the market for carbon credits through industry reliance on consuming fossil fuels (like gasoline and coal), and anticipation of future changes. Those credits are then distributed to companies by the government.

Here’s where it gets interesting. Companies that emit more greenhouse gases than they’re allowed to emit have to pay additional taxes. To avoid paying those taxes, they either have to lower their emissions or buy carbon credits.

But where can they buy them if the government has already given out the carbon credits for the year? If enterprising companies can lower their emissions enough they can sell their carbon credits to other companies.

This is the cap-and-trade marketplace that drives carbon credit values. 

What is a Carbon Offset?

Now that you understand the basics of carbon credits, we can easily explain carbon offsets in comparison.

A carbon credit gives a company permission to emit a certain amount of carbon dioxide. Carbon offsets work to actively cancel out what is being produced. Carbon offset projects work to offset carbon emissions in various ways.

Some carbon offset project examples include reforestation, carbon capture agricultural techniques, and renewable energy projects. 

Voluntary vs Mandatory

Carbon offsetting is the basis of the voluntary carbon credit market. While mandatory carbon credits are government-regulated, voluntary carbon credits are opt-in. Companies can use them to partner with offsetting projects to reduce their carbon footprint.

If you have a passion for shopping, you might have noticed more ecommerce sites offering carbon-neutral shipping at checkout. That’s a great example of a company participating in the voluntary system. By partnering with carbon offsetting companies like EcoCart or ShopPay, they can take another step in supporting sustainable practices.

 

invest in carbon credits

Sustainability Programs

It’s easy to get wrapped up in a single approach when you’re developing your sustainability program. Carbon credits and carbon offsetting are important elements, but they’re only aspects of a well-rounded sustainability program.

Imagine you run a pottery shop online, fulfilling orders through your own warehouses. Your sustainability goal is to reduce your carbon footprint. Could you reach that goal by just partnering with a carbon offsetting company?

Not exactly. You’re still causing emissions, but working with carbon credits and offsetting can help you meet legal expectations and limit your negative impact on the environment. To actually reduce your carbon footprint, your program could involve installing solar panels on your warehouses, recycling materials, or switching to an environmentally-friendly shipping company. 

Learn more about how carbon offsetting is integral to every sustainability strategy by downloading our free ebook.

 

How to Invest in Carbon Credits?

You can thank the European Union (EU) for establishing the first Emissions Trading System (ETS). The EU’s goal is lofty but simple: to lower carbon emissions by 55% of recorded numbers from 1990 by 2030. This is part of the EU’s larger goal to reach carbon neutrality by 2050

With climate change making its impact known, you might think investing in carbon credits would be simple and easy. Unfortunately, carbon credits are mainly voluntary in the United States, with only California and New England following the EU’s example in developing their own cap-and-trade programs and ETS.

Individual Investors

Investing in carbon credits isn’t as accessible as you might think. If you’re an investor wondering how to invest in carbon credits, unfortunately, individuals can’t trade in carbon credits directly. But there are several options that will help you invest in an environmentally friendly future. 

One of the easiest, and lowest-risk, ways you could invest in carbon credits is through carbon credits ETF, or low-carbon ETFs and mutual funds. Investing in companies that pursue carbon offsets to lower their carbon footprint is another great option. Finally, experienced investors can use carbon credit futures to take their investment strategy to the next level. 

Skip to the Beyond Carbon Credits section to learn more. [add jump link within article]

Businesses, Big and Small

Carbon credits don’t have the same effect on every business in the United States. These systems are limited to thirteen states. Depending on local and regional regulations, your business may not be affected by the carbon credit market.

There are two major cap-and-trade markets in the U.S: California and The Regional Greenhouse Gas Initiative (RGGI), a cooperative cap-and-trade market made up of twelve states, including New York, Maine, and Vermont

You can buy carbon credits at auction through the RGGI or the California Cap-and-Trade Program.

 

Beyond Carbon Credits

This article might be on how to invest in carbon credits, but investing in low-carbon companies, carbon ETFs, and carbon credit futures can broaden your investment opportunities.

Carbon Mutual Funds and ETFs

Mutual funds are common, beginner-friendly, and easy to begin trading. You could look at a mutual fund as a kind of collective investment portfolio. When you invest in a mutual fund, you’re investing in a collection of assets alongside other investors.

Your mutual fund is run by a money manager, who curates a portfolio of things like stocks, bonds, and other assets. Their decisions are made based on the mutual fund’s prospectus. The prospectus is a document that describes the mutual fund. It includes information about investment strategies and objectives, fund management, fees, and distribution policies. 

Mutual funds are a great option if you’re looking for a hands-off approach to diversifying your portfolio. Otherwise, you would have to handle reviewing each individual company’s environmental, social, and corporate governance (ESG) standards yourself. Because mutual funds have clear strategies and objectives, you can confidently invest in things that match your values. 

If you’re wondering, “What’s a carbon credit ETF?” you’re not alone. An exchange-traded fund (ETF) is a lot like a mutual fund, with one key difference. ETFs are bundles of assets, like mutual funds. But, ETFs are traded like stocks. You can buy and sell ETFs through brokerage accounts during normal trading hours.

Companies Lowering Greenhouse Gas Emissions

If you’re familiar with trading and comfortable shopping for your own investments, a great option for you would be to invest in green companies directly. With a little research, you can develop a diversified portfolio of companies that lower their greenhouse gas emissions and sell their leftover carbon credits.

When you choose to invest in companies dedicated to decreasing greenhouse gas emissions, you can also invest in carbon offsetting. The great thing about investing in companies that are dedicated to carbon offsetting is that it’s more active than carbon credits. After all, those sold carbon credits still equal greenhouse gas emissions.

Companies that work in carbon offsetting start by removing carbon and other greenhouse gases from the atmosphere, and sell these to environmentally conscious companies. You could invest in carbon-offsetting companies that handle everything from reforestation projects to green energy production.

When you’re trying to decide how to invest in carbon credits, keep your end goals in mind. 

Carbon Credit Futures

If you’re an experienced investor, you might be more interested in using the Chicago Mercantile Exchange to invest in carbon credit futures.

Futures contracts work by fixing the value of an asset, likely a commodity, ahead of time. For example, if solar panels sell at $100 per panel, your futures contract could lock them in at $120 per panel when you trade in six months. 

This helps sellers secure a clear price ahead of time, creating a measure of stability. It also gives investors a chance to speculate on coming commodity values.

Futures contracts come in standard and mini, providing bulk quantities of their commodity. For example, you might invest in a standard futures contract for 1,000 solar panels, or 500 if you invest in a mini.

Once the contract reaches its expiry date, there are two ways to resolve it. The first would be for the investor to take physical possession of the commodity. You would need to be able to receive, store, and (likely) resell whatever commodity you invested in.

The second form of resolution is more common: a cash exchange. The investor and the seller simply trade the value of the assets at the given date.

 

What Do You Need to Know Before You Invest?

When you’re asking yourself how to invest in carbon credits as part of your diversified portfolio, it’s important to understand the risks involved. 

Because of how limited ETS systems are, your carbon credit ETFs will only contain companies working in Europe and some states of the U.S. While they can add diversity to your portfolio, investing in ETFs won’t be as extensive as other options. 

Investing in companies that prioritize reducing greenhouse gas emissions can help you invest throughout international markets. 

Look for companies that try to meet (or exceed) expectations laid out by the Gold Standard, VERRA’s Verified Carbon Standard program, and other sustainability-focused initiatives. Remember that carbon credits and offsets are just one piece of a bigger puzzle, and that can guide you to greener investments and long-term plans. A diverse sustainability program is important. It’s a marathon, not a sprint.

The Gold Standard

When it comes to major carbon standards, the Gold Standard is accurately named. Beyond having an impressive and pointed name, this program uses the Paris Climate Agreement and United Nations Sustainable Development Goals to consider projects and their impact. 

The Gold Standard was established in 2003 by the World Wildlife Fund and other international nonprofits to create a standard that ensured environmental projects were sustainable and had a positive impact.

With a network of partners and a dedication to sustainable development, The Gold Standard helps organizations measure their impact, maximize their positive impact, and develop climate-friendly solutions.

 

Frequently Asked Questions

Now that you know how to invest in carbon credits, here are a few common questions you might have on your mind.

Are Carbon Credits a Safe Investment?

There is no such thing as a safe investment. Based on how an industry performs, you can estimate potential risk, but you can’t guarantee the outcome.

Compared to other investment opportunities, carbon credits have the potential to be riskier than other markets. The reason is that the market is young and limited. We don’t have years of market performance to consider, making the future of the market entirely speculative. While it has been an incredibly profitable market for investors, we don’t know where this market is going.

On the other hand, environmental consciousness is in the public eye in ways that it never has been before. With non-profits, corporations, and government agencies sinking time and energy into green solutions and programming, the market looks promising. 

Investing in any market is a gamble. Do your research and make an educated decision on what’s right for you and your investment portfolio.

What’s a Beginner-Friendly Carbon Credit ETF?

KRBN is a great carbon credit ETF to invest in. This ETF’s strategy is focused on investing in companies that signed the Paris Agreement. Each has committed to reducing greenhouse gas emissions, providing a strong collection of climate change stocks.

This beginner-friendly option makes it easy to invest in carbon credits indirectly.

Is Investing in Carbon Credits Expensive?

Like other markets, you can find a variety of different investment opportunities to meet your needs. ETFs and mutual funds are a great way to get started if you don’t have much money. For the cost of a share, you can start diversifying your portfolio and supporting a greener future.

Why Is It Important to Invest in the Environment?

We live in a world where climate change is becoming an increasingly imposing threat; it’s easy to understand why people want to make a global impact with their investments. Carbon credits and carbon offsets are a great way to do that, allowing you to invest in everything from carbon credit futures to carbon offset ETFs. 

What Are the Limits of Carbon Credits?

Carbon credits and their cap-and-trade marketplace are still limited in their scope. National and state governments maintain the system by setting the cap and decreasing it over time. Companies sell unused carbon credits and some, like Shell, use the resulting cash flow to fund green projects.

Individuals can’t buy carbon credits directly. Carbon offsets are more accessible to individual investors. 

Carbon offsets work by proactively offsetting greenhouse gas emissions, which they trade with climate change-conscious organizations. Some examples of carbon offset projects are protecting trees and building renewable energy sources.

How Do I Lower My Risks When Investing in the Environment?

With a young and limited market, investing in decreased greenhouse gas emissions can be unpredictable. You should always do your research before making an investment decision, and maintain a diverse portfolio to meet your needs.

Different ways of investing in carbon credits, like ETFs or buying stock in green companies, are accessible ways for investors to branch out into green investments. ETFs are more beginner friendly, as they are maintained by a manager. If you want to try buying stocks, look for companies verified by the Gold Standard, the Climate Action Reserve, and other reliable sustainability organizations.

 

In Conclusion

At EcoCart, we’re proud to help businesses offset their carbon emissions, educate their consumers, and leverage valuable insights. For us, every project is a chance to create access to carbon offsetting while setting industry standards.

Our carbon offset projects are diverse, meeting unique environmental concerns around the world. We design them to positively impact the environment and local economies while supporting communities.

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