Understanding carbon credit futures: An overview of the carbon market

Understanding carbon credit futures: An overview of the carbon market

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Carbon trading and carbon credits have become increasingly popular in recent years as a way to reduce greenhouse gas emissions and combat changing climates. One of the latest developments in the carbon market is carbon credit futures. It is a financial instrument providing investors with a way to participate in the carbon market and reduce their risk. This article will explain what carbon credit futures are, how they work, and the available exchange-traded fund (ETF) instruments.

Understanding carbon credit futures An overview of the carbon market_visual 1

What are carbon credit futures?

Carbon credit futures are a type of financial instrument based on carbon credits. They represent a reduction in carbon emissions. Carbon credits are issued as certificates or permits, and each equals one metric tonne of carbon dioxide (CO2). Carbon credits are used to reduce overall carbon emissions and mitigate climate instability. Carbon credit futures are a credit instrument allowing the buyer to offset emissions through carbon offset projects without directly investing in projects at such time.

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Understanding carbon credit futures An overview of the carbon market_visual 2Tree seedlings – Sawa Afforestation Project, Cameroon, DGB.

How carbon credit futures trading works

Carbon credit futures contracts physically deliver carbon credits. Each futures contract equals 1,000 carbon credits generated from projects that protect natural ecosystems. A futures contract is a kind of derivative wherein two parties agree to trade an underlying asset at a specific date for a specific price. The underlying assets, in this case, are the carbon credits. With fluctuating carbon prices, carbon credit futures can mitigate risk when added to an investment portfolio. However, it’s important to note that futures contracts are a more advanced trading strategy and are a more complicated way of investing in the assets that underlie an ETF, as it tracks the performance of the futures.

Market outlook: rapid growth in voluntary carbon markets with rising demand for high-quality credits

Carbon credit ETF instruments available

Several carbon credit ETF instruments are available, such as the KraneShares Global Carbon ETF (KRBN), KraneShares Global Carbon Offset Strategy ETF (KSET), KraneShares California Carbon Allowance ETF (KCCA), KraneShares European Carbon Allowance ETF (KEUA), Horizons Carbon Credits ETF (CARB), iPath Series B Carbon ETN (GRN), and SparkChange Physical Carbon EUA ETC (CO2.L). KRBN provides exposure to mostly the European Union Emissions Trading System (EU ETS) carbon credits, California’s CCA carbon credits, and the RGGI carbon credits of the northeastern United States. KSET offers exposure to carbon offset futures contracts, while KCCA provides direct exposure to the California Carbon Allowances. KEUA provides direct exposure to a portfolio of carbon credit futures contracts that trade under the world’s largest carbon market, the EU ETS, while CARB trades on the Toronto Stock Exchange. GRN provides exposure to carbon credit futures contracts that trade on the ICE Futures Europe exchange, and CO2.L directly buys and holds EU Allowances.

Carbon credit futures in the carbon market

Carbon credit futures allow investors to participate in the carbon market and reduce their risk. With several available carbon credit ETF instruments to assess, an investor can customise their portfolio allocation to the global carbon credit market. While the carbon credit futures market can be exciting, it also comes with risks, as it’s not possible to predict with certainty what the future holds. However, the upward trend in the price performance of most carbon ETFs is a good reference point for an investor to test the waters of carbon trading.

Understanding carbon credit futures An overview of the carbon market_visual 3Nicholas Wall providing training – Sawa Afforestation Project, Cameroon, DGB

Explore the benefits of green investing

At DGB, we are committed to setting a precedent for transparency and accuracy in the carbon credit market and believe the success of this market is vital to achieving our goals of helping nature to prosper. By participating in the carbon market via carbon projects, carbon credits, and green bonds, we help companies and investors reduce their carbon footprint and contribute to a greener, more sustainable future. The potential for growth in the carbon market is enormous, and we are excited to be at the forefront of this movement, helping to shape the industry and drive positive change for the planet. 

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