Domen Zavrl is a dual PhD holder, having studied applied macroeconomics and system dynamics. This article will look at carbon credits, an exciting new market that is tipped to reach $1.6 trillion in total traded value by 2028.
Still in its formative stages, the global carbon credits market is volatile and prone to scandal. Nevertheless, commodity traders are increasing their investments in this relatively new sector, in the process boosting their ESG scores and minimising risk.
Carbon credits are bought and traded to compensate for carbon dioxide and other greenhouse gas emissions, enabling ESG-savvy companies to mitigate the environmental impact of their operations. Essentially serving as a permit system, carbon credits enable purchasers to emit a certain level of greenhouse gas emissions.
Some carbon markets are entirely voluntary, while others are operated and regulated by international bodies and governments, with certain industries required to participate. A key element of cap-and-trade programmes designed to reduce greenhouse gas emissions, carbon markets effectively put a price tag on greenhouse gas emissions, rewarding businesses, industries and countries that reduce their emissions over time and creating financial disincentives for those that emit more than their fair share.
Carbon credits are a unique type of commodity. As they are not physical, there is no need for transportation or storage in the same way as grain or oil. Operating in a largely unregulated environment, the precise value of carbon credits can be difficult to gauge and is subject to fluctuation even after purchase.
Carbon credits and traditional commodities do share some similarities in common. Carbon credits represent a physical asset and therefore require verification, quality control and project management. They are consumable and also in high demand by some of the world’s largest companies.
Hannah Hauman serves as head of Trafigura’s trading business, leading one of the biggest players in the carbon credits market. She suggests that carbon credits are not all that different from the oil she used to trade, explaining that to facilitate transactions market risks and inefficiencies need to be absorbed for clients.
While buyers prefer to pay after delivery with guarantees on volume and price, carbon credit sellers want prepayments and flexibility in delivery volumes. Hannah Hauman points out that the market is the same as any other in that a trader’s value comes from where there are large, liquid, inefficient markets that need risks absorbed.
Trafigura is a company that is betting big on carbon. Hannah Hauman indicates that her desk went from almost nothing to trading more than 100 million carbon-equivalent credits annually over the space of just three years. In 2024, Trafigura participated in several major projects in the industry, including investing $100 million in a partnership with Temasek, funding a reforestation project in Columbia. Announced in November 2024, the project is intended to begin issuing carbon credits before the end of 2025.
According to the World Bank, carbon markets help to reduce costs and mobilise resources, giving countries and companies the space to smooth the low-carbon transition. Encouraging adoption of carbon markets, whether voluntary or mandatory, enables countries that signed the Paris Agreement to meet their environmental obligations so that the international community can reach its collective goals.
Other significant benefits of carbon markets is their ability to create green jobs and develop sustainable energy sources, bolstering global commitments to environmental protection. A 2023 report published by Morgan Stanley predicts that the voluntary carbon offset market is on course to grow from approximately $2 billion in 2022 to around $100 billion in 2030, helping organisations around the world to become more environmentally friendly and in the process protecting humankind from the worst impacts of climate change.