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Carbon credits

In much the same way as financial markets trade in different currencies, carbon markets trade different types of carbon credits. For example, carbon permits generally are issued by governments as part of a carbon pricing mechanism and carbon offsets are generated by abatement projects through schemes such as the Direct Action Plan.

In Australia these credits (Australian Carbon Credit Units – ACCUs) are issued by the Clean Energy Regulator. Each carbon credit, or ACCU, represents one tonne of carbon dioxide (CO2) or carbon dioxide equivalents (CO2-e). Abatement from all sorts of activities, including those that reduce methane or nitrous oxide emissions, can be measured in tonnes of CO2-e. This standardisation allows the credits from different activities to be traded more easily and is comparable with international credits such as those from the European Union or the Kyoto Protocol.

Carbon credits may be traded and used to meet mandatory obligations and voluntary commitments. For example a contracted project that has not produced enough carbon credits would need to purchase additional units on the secondary market.

In Australia, carbon credits can be bought by individuals and organisations wishing to voluntarily offset their emissions. This is referred to as the voluntary carbon market. Companies estimate their carbon footprint, reduce their emissions and offset the remainder using carbon credits that comply with the Australian Government’s National Carbon Offset Standard.

There are two ways to sell carbon credits generated from an Emission Reduction Fund approved method:

  • Sign a contract to sell the carbon credits to the Clean Energy Regulator at an agreed price. Contracts are submitted to the Clean Energy Regulator through a reverse auction process with a nominated price — the lowest cost-per-ACCU projects are chosen.
  • Sell credits on the secondary market.

A guide to investing in carbon credits has been written by the Australian Securities and Investments Commission and is available here.