Should I Invest in Carbon Credits?

If you’ve heard about the carbon credit market, you’re probably wondering, should I invest in carbon credits? Carbon markets have been heating up (pun intended) recently thanks to new regulations and a desire on Wall Street to provide retail investing options. Carbon credits are essentially certificates that indicate a reduction in greenhouse gas emissions by companies and projects. These credits can be traded on a variety of platforms, including exchanges for emission trading systems and carbon taxes. The prices of these carbon credits are based on supply and demand, just like stocks.

When companies produce more carbon dioxide (CO2) than they are allowed to, they must buy carbon credits from companies that have reduced their emissions to make up the difference. This helps to offset the emissions that the company could not reduce on its own, thereby keeping the planet from going over a climate change tipping point.

Whether or not you should invest in carbon.credit depends on your personal goals and risk tolerance. There are several different ways to get involved with the carbon credit markets, but a fund that specializes in these investments is usually the best way for an individual investor to participate. This is because funds offer a more diversified approach to the carbon credit markets and limit your market exposure versus buying individual carbon credits directly.

For example, one popular carbon fund that offers a low-risk way to get into the markets is Kraneshares Global Carbon ETF, which holds futures contracts for European Union Allowances, known as EUA. The EUA market is part of the emissions trading system, which includes a cap-and-trade program.

Another option is a voluntary carbon credit marketplace that lets companies work with other environmentally conscious businesses and individuals to offset their own emissions. These marketplaces are typically run by nonprofit organizations, but they are not regulated in the same way that carbon markets are. This means that you should carefully vet these types of investments before making a purchase.

Investing in carbon credit ETFs is also a great way to get involved because they are liquid and often more accessible to individual investors than direct carbon credits. However, remember that ETFs are still susceptible to the same risks as other stocks and bonds, so you’ll want to keep a healthy diversified portfolio in place.

In addition to these funds, there are a number of physical and financial funds that can help you diversify your portfolio and support companies that are working on the environment. For example, NCX, formerly SilviaTerra hosts a Natural Capital Exchange marketplace and pays forest owners not to cut down their trees in order to pull CO2 from the atmosphere. The company has attracted investors such as Salesforce CEO Marc Benioff and Union Square Ventures.