Managing carbon credit pricing variables

Many organisations that are looking to achieve net zero carbon emissions choose to purchase carbon credits to offset their CO₂ emissions. Carbon credits reduce the risk and administration of investing directly in these projects and can be purchased either directly or from a broker; where there is also the added benefit of being able to invest in a range of projects simultaneously.

There are many factors that affect the prices different carbon credits command, particularly for organisations that are not part of a mandatory emissions trading scheme. The projects can be wildly different, with some variables making a project more desirable to end buyers. As different carbon credit attributes mean different prices, it is vitally important to be able to manage each individual credit across its lifecycle so that every variable is properly recorded and commands its fair price.

What affects carbon credit prices?

• Carbon ratings and standards – a range of independent organisations act as ratings agencies or accrediting bodies to certify that projects are meeting a given standard. This credibility can mean that credits command higher prices.
• Project size and location – some projects have higher per-tonne costs due to their scale or difficulties due to the region’s infrastructure.
• UN Sustainable Development Goals – projects may provide other ESG benefits such as high-quality jobs, clean water, or sustainable infrastructure, which can command a higher price.
• Project methodology and where the impact is felt – some projects are more desirable due to their tangible benefits in deprived communities, such as cookstoves that reduce wood burning and improve health outcomes. Projects that remove CO₂ are generally seen as more beneficial than projects that avoid carbon emissions.
• Additional services – the organisation purchasing credits will typically promote their impact and may be willing to pay extra for services such as project updates and photographs for marketing materials.
• Vintage – the vintage refers to the year a credit is issued. Although standards bodies stress that older vintages are not inherently problematic, many buyers are wary of purchasing older vintages due to concerns that the project must be lower quality if the credits have not already sold.

Pricing contracts

With so many variables to account for, creating OTC contracts for these diverse carbon credits can be both time-consuming and prone to errors. But software designed for managing environmental assets, such as Gen10’s NetZero OS reduces much of this complexity and risk. Structured contract templates help to standardise contract terms, and each credit attribute that affects pricing can be added as a flat rate or calculated according to your own pricing formulas. And our clients also determine for themselves which attributes they would like to use and price against when setting up their system.

Managing carbon credit prices when trading

For both project developers and brokers, it is essential to manage and record every variable that impacts on price for each individual credit at a granular level. If the variables that command a price premium are not properly registered against each credit, the extra value they can create is lost.

And in the environment of growing transparency, this granular, credit-specific, detail is crucial in protecting all organisations from risk. Because credits are traded OTC and purchase decisions are made based on these additional benefits, poor monitoring of them risks reputational damage, and could also represent a legal risk from delivering credits that do not meet the contract terms. Traceability across the credit lifecycle is therefore essential for all; from the end buyer, through any trading, collating, or splitting credit inventory, back to the original project.

Managing each individual credit on a granular level across the entire lifecycle can be a challenge, and demonstrating its provenance is an even greater one. Using dedicated software to manage your carbon trading operations is the most efficient way to manage the full credit lifecycle and has the added benefit of providing a full audit trail for complete traceability.

NetZero OS allows you to manage the complete carbon credit lifecycle in one easily navigable system, with a focus on operations. This means that project owners can manage their complete credit inventory for multiple projects, along with any sustainability documentation and certification, and allocate each vintage to buyers with a clear audit trail.

Brokers and traders can capture their purchase contracts then use the inventory management features to split and combine credits from different purchases as required, maintaining their individual assays, pricing variables and associated documents. Or they can create straightforward back-to-back trades. They can rest assured that clients are allocated the appropriate credits and that each credit is properly priced, including all its additional factors, with an audit trail that provides straightforward traceability.

Helping procurement teams price accurately

Organisations purchasing carbon credits to retire them also need systems to accurately record and track their credits through to retirement. They need to be able to demonstrate that all the real-world CO₂ emissions they are claiming to offset have been balanced by the appropriate carbon credits. And any claims of further ESG benefits, such as supporting the UN Sustainable Development Goals, need to be backed up by evidence to avoid accusations of misrepresentation or greenwashing. The inventory management aspect of NetZero OS includes all stages in the credit lifecycle through to retirement, with a digital audit trail to show actions up to that point so that all credits can be traced and all carbon emissions offset.

Technology is the solution

Pricing carbon credits is complex and dependent on many different variables. And due to the developing nature of carbon markets, the attributes that affect pricing may be different depending on the actors involved. All organisations active in carbon markets can benefit from tools that help them price carbon credits more accurately and more efficiently, and these tools provide other benefits on top of pricing, from helping to standardise contracts and reduce risk to inventory management and auditing.

Find out more about NetZero OS, the lifecycle solution for carbon credits, today.