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Is carbon trading going to boom in 2022?

By Indrabati Lahiri

01:00, 25 January 2022

Image of carbon trading icons in a green background
Carbon trading icons – Credit: Shutterstock

Carbon trading is the process of companies and traders trading permits and credits, allowing users to emit a certain amount of carbon dioxide. This has seen a significant increase over the last few years, as governments all over the world attempt to employ it as a means of eventually reducing emissions and managing climate change.

In 2022, the narrative takes a fresh perspective, as global eyes turn towards Europe’s renewed commitment towards reducing climate emissions, which is backed up by the steadily rising prices of carbon units.

According to Stephen Donofrio, director of Ecosystem Marketplace and Supply Change at Forest Trends, the boom in the market this year would be due to the increased demand for more coordinated efforts to deliver credible and quality supply of carbon credits, with better designed and transparently communicated strategies for the demand side.

Fulfilling the 2015 Paris Agreement

This rapid climb in voluntary carbon credits demand has also been spurred on by countries speeding to meet the terms of the 2015 Paris Agreement, which sought to hold global warming down to much below 2oC (degree Celcius), with the optimum range being around 1.5oC.

This steady rise in carbon trading demand caused several trading exchanges, such as CBL Markets, to expand rapidly and introduce new types of emissions trading contracts, as investor needs kept getting more varied and complex. CBL released two new contracts recently which led its market share in the voluntary carbon market to double in size.

Rene Velasquez, CBL Head of Global Carbon believes that this may be the year to reach out to an even bigger market share, as over $1bn of credits were traded over the past year, which is only expected to keep increasing this year as well. As more trading exchanges include emissions trading and upgrade the necessary infrastructure, the voluntary carbon market is speculated to appeal to more investors, as the world moves collectively towards a greener future.

Other major exchanges, such as International Exchange (ICE), have also announced that they will be releasing global carbon futures contracts in the beginning of 2022, kicking off the year with a bang. 

Towards a scalable Carbon market 

With the global climate crisis advancing at an alarming rate, governments and corporations alike have finally roused to action, with the more ambitious ones setting net-zero targets for the next couple of decades. This has led to increased competition in the ESG sector as well, as companies attempt to stay relevant and attract investors by polishing their ESG practices and portfolios further.

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According to this report by Trove Research, the carbon market is expected to be valued at between $100bn to $180bn by 2030. This is expected to be backed up by the Taskforce on Scaling Voluntary Carbon, private organisations comprised of academics, a number of companies, international bodies and civil society. Through this task force, a smoother transition to a lower-carbon economy with the help of a sophisticated and scalable carbon market seems to be the goal.

For some developed countries, such as France and Britain, which have emission trading systems, this can be a helpful way of helping them meet carbon emission standards by steadily making it more expensive. However, there is yet to be a uniform pricing standard across these countries or regions, which gives rise to its own set of barriers.

Concerns of greenwashing 

These efforts to reach a more sustainable goal, however, especially on the part of companies, has also come under a fair share of criticism, with some investors wondering if it may be “greenwashing”. This occurs when a company or organization continues to give the impression of moving towards a greener way of operation, without actually making the necessary changes to do it.

With the popularity of ESG stocks and the carbon trading market in general, this can certainly be a valid concern, as it becomes increasingly harder to be discerning about genuine companies.

This has also led to the carbon emissions trading sector to be become more tightly regulated in order to protect traders and investors, with a separate bilateral system and completely transparent both to public and private members.

 

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The difference between trading assets and CFDs
The main difference between CFD trading and trading assets, such as commodities and stocks, is that you don’t own the underlying asset when you trade on a CFD.
You can still benefit if the market moves in your favour, or make a loss if it moves against you. However, with traditional trading you enter a contract to exchange the legal ownership of the individual shares or the commodities for money, and you own this until you sell it again.
CFDs are leveraged products, which means that you only need to deposit a percentage of the full value of the CFD trade in order to open a position. But with traditional trading, you buy the assets for the full amount. In the UK, there is no stamp duty on CFD trading, but there is when you buy stocks, for example.
CFDs attract overnight costs to hold the trades (unless you use 1-1 leverage), which makes them more suited to short-term trading opportunities. Stocks and commodities are more normally bought and held for longer. You might also pay a broker commission or fees when buying and selling assets direct and you’d need somewhere to store them safely.
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