# Carbon Credit Markets

- Author: Joichi Ito
- Date: 2006-08-13T07:34:46Z


Today I heard a presentation by Michael Molitor from Climate Wedge. He is an expert on environmental issues and his company has created a fund that buys and sells "Voluntary Carbon Units" (VCUs).

Carbon credits or Carbon Units are basically a unit that represents one metric ton of CO2 emissions. The EU has a market called a Compliance market where companies can buy credits to offset their EU Allowances. For example if company X only has an allowance of 100 tons of CO2 emissions, they have the choice of either buying carbon credits on the market or lowering their emissions by that much. Emission allowances will continue to go down driving prices of credits up and/or causing companies to innovate instead of paying for these credits. It is any interesting and now exceedingly common practice that makes it easier for companies to become "carbon neutral" while providing incentives for companies to innovate.

In addition to the formal compliance market which is mostly for EU regulated companies to buy and sell their credits to meet their allowances, there is a voluntary market which involves "softer" carbon credits and allows companies that are not yet regulated to play in this market. HSBC, for instance has announced that it is now "carbon neutral". It is not required by law to do this, but as people become more sensitive to the issues of global warming, carbon neutrality will have an increasing impact on customer and investor relations.

There are a number of individual level carbon neutral initiatives. Airlines, automobile companies, oil companies are beginning to provide carbon neutral products where a portion of the cost or the payment of an addition expense go toward making the use of that product or service carbon neutral. The interesting thing is that in most cases the costs are quite small. To make your whole life carbon neutral it costs roughly 1% of your income.

I think this is a great idea and the notion of being carbon neutral is very appealing. I am going to try to do this immediately.

However, a few things concern me.

I've googled around for companies and non-profits that offer carbon units and some look rather sketchy and/or expensive. There is also the issue of the quality of the carbon unit. Some little city threatening to build a coal power plant, then not doing it in exchange for carbon units seems less sincere than someone rolling out a photovoltaic power generator. "Good" carbon units like those on the Compliance Market trade at a premium because they are more closely audited and provided from reputable organizations. I think that these markets will grow quickly and hope the scam artists don't steal money from too many good intentioned people.

The other thing that scares me a bit is that although I like markets, I worry that a lot of money will flow to companies trying to innovate in this space. I see a VC bubble in energy technology right now too. When I see lots of money pouring into an industry like this, I worry that a bubble will form causing inefficiencies, reduction in quality of investors, noise level increases drowning out experts and other things that I saw during the dot com bubble.

Finally, this is not enough. This is all a huge step in the right directly, but we need to be doing everything we can, and even that may not be enough. It will sure feel good to be carbon neutral, but we definitely can't stop there.





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