How to Acquire Carbon Credits

Although there are some trading exchanges that facilitate carbon credit transactions, most transactions occur “off-exchange”, making price discovery difficult. The price of a carbon credit can range from under US$1 to well over US$500 (e.g., for advanced direct air capture carbon enhanced removal credits). Prices tend to vary mostly by project type, with minor differences between carbon credit labels (e.g., VERs, CERs).[1]

Although carbon credit buyers do not need to be familiar with every carbon crediting program rule and procedure, they should have a basic understanding of how carbon credits are generated, transferred, and used. Purchasing options can depend on where in this “lifecycle” a buyer gets involved. In general, the earlier in the lifecycle, the better the nominal price and terms will be – but the greater the delivery risk and the longer it may take to actually receive carbon credits.

The basic lifecycle for carbon credits looks like the following:

1. Methodology development. Before avoided emissions or enhanced removals can be accepted for issuance of carbon credits, they must be shown to meet carbon credit quality criteria. This process requires a methodology that is specific to the type of crediting project generating the avoided emissions or enhanced removals. Most crediting programs have a library of approved methodologies covering a wide range of project types. However, project developers may also propose new methodologies for program approval and adoption.

2. Project development, validation, and registration. A crediting project is designed by project developers, financed by investors, validated by an independent verifier, and registered with a carbon crediting program. Official “registration” indicates that the project has been approved by the program and is eligible to start generating carbon credits after it begins operation (next step).

3. Project implementation, verification, and credit issuance: A crediting project is implemented, then monitored and periodically verified to determine the quantity of emissions it avoided. The length of time between verifications can vary, but is typically one year. A crediting program approves verification reports, and then issues a number of carbon credits equal to the quantity of verified CO₂-equivalent avoided emissions or enhanced removals. Carbon credits are generally deposited into the project developer’s account in a registry system administered by the crediting program.

4. Carbon credit transfer. After they are issued, carbon credits can be transferred into different accounts in a crediting program’s registry. Transfers are usually undertaken as a result of a purchase or trade (i.e., after a purchase, carbon credits are transferred from the project developer’s account into an account owned by the purchasers). Carbon credit buyers may then use the carbon credits by retiring them (see next step), hold them, or transfer them to other accounts. Carbon credits may change hands multiple times (getting transferred among multiple accounts) before they are ultimately retired and used.

5. Carbon credit retirement: Carbon credits must be “retired” to use them and claim their associated avoided emissions or enhanced removals. Retirement occurs according to a process specified by each crediting program’s registry. Once a carbon credit is retired, it cannot be transferred or used (meaning it is effectively taken out of circulation). (Note: some crediting programs use the term “cancellation” instead of “retirement”. Functionally, they are the same, although “cancellation” more often refers to taking credits out of circulation without them being claimed or used).

Regardless of which market you are in, there are usually multiple ways to acquire carbon credits, ranging from hands-on direct engagement in crediting projects to purchasing carbon credits on an exchange. The way in which you acquire carbon credits may influence your strategy for ensuring that they are high-quality. For example, if you find you need to acquire carbon credits quickly and at low cost, and you lack the capacity to contract with crediting projects directly, then you are probably better off restricting purchases to project types with a low risk for any quality concerns.

Carbon credit lifecycle and buyer purchase options at each stage:

The right approach for you as a buyer will depend on:

• Your required timing (e.g., how quickly you need to acquire carbon credits, and when you need them delivered);
• How many carbon credits you need to acquire;
• The price you can afford; and
• The amount of time and effort you can put into the acquisition (e.g., whether you have the capacity to contract directly with individual projects, or need to pursue more hands-off approaches).

The table below presents some common options for purchasing and using carbon credits. Different options will have different pros and cons in terms of price, volume, timing, and ability to influence or evaluate quality.

Engage in new methodology development The vast majority of carbon credit buyers do not get involved in methodology development. Occasionally, however, a buyer may identify a new project type that is particularly attractive (e.g., because it is related to their line of business or involves communities in which they engage), and support the development of a new methodology in order to be able to both invest in these projects and generate carbon credits. This approach can be a risky and time-intensive strategy, however, and should only be pursued by the most sophisticated buyers.
Pros: Can create an opportunity to invest in projects that are particularly important to you as a buyer Can develop novel project types for crediting Can allow “at cost” access to carbon credits In principle, allows significant control over quality (to the extent you can be involved in project development)	Cons: Likely to be a high-cost approach overall Long lead time (e.g., 3-5 years, variable by project type) before carbon credits are finally issued (the methodology must be developed, the project must be developed and implemented) Risky, since it can be difficult to get new methodologies approved Carbon credits are delivered over time rather than in a single year Requires time, resources, and expertise to develop relationships and identify good projects for investment Likely commits the buyer to a long-term purchase agreement
Direct investment in a crediting project One option for buyers is to invest in a crediting project in return for rights to (some portion of) the carbon credits the project is able to generate. Getting involved during project development and registration allows for deep project engagement and a fuller understanding of a project’s strengths and weaknesses. It can also give buyers access to carbon credits at a lower cost than purchasing them through third parties.
Pros: Allows “at cost” access to carbon credits, hedging against future price increases Allows deep engagement with project and understanding of / influence over quality characteristics	Cons: Long lead time (e.g., 3-5 years, variable by project type) before carbon credits are delivered (project must be developed and implemented) Carbon credits are delivered over time rather than in a single year Requires time, resources, and expertise to develop relationships and identify good projects for investment Commits the buyer to a long-term purchase agreement
Contract for delivery with a crediting project developer A commonly used purchasing option is to contract directly with a project developer for delivery of carbon credits as they are issued. Such contracts generally take the form of “Emission Reduction Purchase Agreements” (or ERPAs). An ERPA provides project developers with an upfront assurance that they will be able to sell a reliable volume of carbon credits. For buyers, the advantage is being able to lock in a price for credits that is typically lower than market prices. ERPAs can be structured in numerous ways, including as options contracts.
Pros: Allows low-cost access to carbon credits, hedging against future price increases Generally lower search/transaction costs than direct project investment The process of identifying and engaging with project developers can allow a deeper understanding of crediting project quality characteristics	Cons: May have a long lead time before carbon credits are delivered (e.g., 2-3 years; variable by project) Commits the buyer to a long-term purchase agreement Carbon credits are delivered over time rather than in a single year Requires time, resources, and expertise to identify crediting projects
Purchase in a one-off transaction from a project developer In some cases, project developers may have unsold carbon credits for which they are seeking buyers. Purchasing directly from a project developer can avoid some transaction costs, and still affords good access to a project to understand its quality characteristics. Project developers are motivated to sell their project’s credits, so performing your own due diligence is valuable to confirm project claims.
Pros: Lower cost than going through brokers, exchanges, or retailers Avoids any long-term commitment to purchase carbon credits Carbon credits can be delivered immediately Allows engagement with and understanding of the crediting project and its quality characteristics	Cons: It may be difficult to find project developers with carbon credits to sell (who are not going through brokers or exchanges) Available volumes may be low Crediting projects with significant quantities of unsold credits may raise quality concerns Project information from the developer requires additional scrutiny to evaluate
Purchase from a carbon credit broker As is the case for most commodities, numerous firms act as brokers for carbon credits. Brokers can make it easier to identify a mix of carbon credits from different project types, and facilitate larger transactions. Depending on the broker, they may also be able to provide details and their own analysis about the projects from which carbon credits are purchased. Many brokers also serve the retail carbon credit market, facilitating low-volume purchases and (if needed) retiring credits on buyers’ behalf (see below). Some brokers sell carbon credits from projects they have developed in addition to projects developed by others. This may provide efficiencies in pricing, but it can affect the ability of the broker to be impartial about credit quality. In these cases, it is important to heed the same caveats that apply to direct purchases from project developers.
Pros: Allows quick acquisition of varying volumes of carbon credits without long-term contracts Immediate access to carbon credits from a variety of projects and project types Better/easier access to project information than going through an exchange Avoids time and effort required to engage directly with projects	Cons: Higher (direct) cost than going through project developers or exchanges It may not be a viable option for low-volume transactions (either not offered, or they may charge higher fees) It may still be more difficult to access information, needed to perform due diligence on credit quality, than buying directly from the project developer
Purchase carbon credits on an exchange There are a number of environmental commodity exchanges – mostly in North American and Europe – that list carbon credits for sale and work with registries to enable transactions. Purchasing carbon credits on an exchange can be relatively quick and easy, but it can be harder to obtain the information needed to evaluate the quality of these credits.
Pros: Allows for quick, easy transactions Immediate access to a wide range of projects and project types Exchanges will often offer carbon credits at low prices Can access large volumes of carbon credits It may be lower cost than going through brokers	Cons: It may not be a viable option for small-scale retail buyers Can be difficult to obtain information needed to ascertain carbon credit quality Exchanges generally do not try to screen for credit quality, so obtaining carbon credits through an exchange may be a higher risk (low price will often correlate with low quality)
Purchase carbon credits from a retailer For buyers looking to acquire only a small number of credits (e.g., small companies or individuals), the most feasible option for purchasing carbon credits is often to go through a retailer. Retailers often provide access to carbon credits from a range of different projects and will provide at least basic information about the projects from which they buy. In most cases, the retailer will maintain an account on a crediting program registry system and will retire carbon credits directly on a buyer’s behalf. If you are a buyer, it may be important to ensure that the retailer is specific about the purpose for which the carbon credits were retired and that you are designated as the official “user.” As with brokers, some retailers develop their own projects to generate carbon credits for sale. Buyers should carefully review the portfolio of projects that retailers have on offer, and closely scrutinize purchases from projects owned or developed by a retailer.
Pros: Allows the purchase and use of carbon credits in small volumes Immediate access to carbon credits from a variety of projects and project types No long-term purchase commitments	Cons: Likely to be the highest priced option for purchasing carbon credits Generally not a good option for purchasing in high volumes Retailers will generally portray their carbon projects in the best light possible (especially if they developed the projects themselves); it may be difficult to obtain information needed to fully evaluate credit quality Offers the least control, e.g., over retirement and use

Purchasing large volumes of carbon credits generally requires establishing an account in the registry system of the crediting program that issued the credits. These accounts typically require an annual fee, which varies across crediting programs but is generally around $500, in addition to small fees for credit transfers. Once the carbon credits are acquired, they will be transferred to your account, where they can be retired and counted towards a GHG emissions target. For low-volume, retail carbon credit purchases, sellers typically maintain accounts which they use to acquire and retire carbon credits on your behalf (see the table above).

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[1] In general, price discrepancies among programs arise only when one program serves a captive market with strong demand that other programs may not serve, such as the regulatory cap-and-trade market in California.