Carbon credits are the primary products traded on the voluntary carbon market. These are units which are supposed to represent a tonne of emissions that has been reduced or removed from the atmosphere.

Derivative contracts that bundle together or otherwise repackage carbon credits are also traded. Derivative contracts involve the trade in actual carbon credits (the underlying assets of the contracts) and index products. They allow investors to bet or hedge against future carbon credit price fluctuations. 

Carbon credits can be purchased in the over the counter spot market or for forward or future settlement, sometimes referred to as “offtake” agreements. 

Indexed products include, for example, Global Emissions Offsets (GEO) & Nature-based Global Emissions Offsets (N-GEO), which were designed to increase liquidity in the market. Instead of buying an individual credit, a buyer can purchase a GEO or N-GEO contract. At settlement of the contract, the seller delivers carbon credits that adhere to the contract’s specifications. 

Like many index products, GEO and N-GEO trade both in spot and futures markets.

Although carbon credits deliver a single, one-off emission reduction or removal, they can change hands multiple times before so-called retirement (when the end buyer removes the carbon credit from the registry to ‘use’ it for their own ends). These additional trades are purely financial, and no money from these trades actually flows to the projects. 

Various trade paths and contracting styles exist, each with its own set of advantages and disadvantages.

Typically, a project owner implements a mitigation project that is certified by a specific carbon market standard (such as the Verified Carbon Standard, Gold Standard, or Plan Vivo), which in turn issues carbon credits to the project owner (for a more detailed explanation of the creation of carbon credits, see our Carbon Markets 101 guide). In theory, the credits represent the quantity of emission reductions achieved by the project in a given timeframe. However, the climate impact of these projects is routinely overstated (see, for example, the CMW-backed investigation into REDD+ forestry projects).

Carbon credits are issued and transferred to the project owner’s account in the respective programme registry. From that point onwards, there are no restrictions on the number of times a credit can be traded, nor is there (in most cases) an expiration date on the credits. Formal changes in ownership through credit trade happens in the programme registry, by moving credits from one account to another. This is also where ‘used’ credits are retired. In most registries, however, account-level data is not readily available, meaning there is no transparency around who holds which projects’ credits in their account(s). 

There are several reasons why companies or organisations buy carbon credits on the voluntary carbon markets.

1. As part of a sustainability strategy:
   Some companies or organisations aim to compensate for, or offset, their emissions by investing in carbon credits. This model, however, is flawed and not scientifically sound. Due to increased scrutiny, some companies are gradually moving away from offsetting as a practice. Instead of offsetting emissions, the contribution model, in which buyers simply say they invested in certain projects without claiming to offset their emissions, is gaining traction. This paradigm enables companies to invest in climate action (through carbon credits or other climate finance tools) while communicating honestly and accurately about their efforts.
   
   
2. Speculation or investment:
   Some companies or organisations buy carbon credits in order to resell them. They act as intermediaries and keep a share of the revenues for their own profit.

1. Project developer to end buyer:
   Buyers can purchase carbon credits directly from the project developer and retire the credits for their own ends.
   
   Buying directly from the project might be difficult for buyers unfamiliar with carbon markets, since they have to navigate through the complex infrastructure of the VCM. And while a direct purchase and the accompanying short transaction chain give the impression that all trade participants are easy to trace, in reality, this is far from straightforward, since buyers do not have to disclose details about their purchases. In this direct transaction, at least the buyer knows that their money is going to the project owner (this is not the case when a multitude of intermediaries is engaged). How the project developer uses that money – and how much of it goes into climate action, how much to local communities and how much is extracted as profit – is not always transparently communicated to buyers and is virtually never made public.

1. Project developer to intermediary to end buyer:
   Carbon credits can change hands on the secondary market before being sold to their final user or being retired on their behalf. The go-betweens that trade carbon credits can be brokers, resellers, marketplaces (so called ‘exchanges’), and even cryptocurrency platforms.
   
   Some larger buyers with commodity trading desks (such as oil giant Shell) transact directly with “exchanges” like Carbon EX. For smaller buyers, it is often easier to use the services of a broker or consultant.
   
   For both buyers and sellers, it can be convenient to go through intermediaries. These go-betweens assist buyers who do not have the capacity, interest or experience with carbon markets to find credits that fit their needs. Intermediaries also help project owners find buyers for the credits generated. For a more detailed assessment of these actors and the role they play in the voluntary carbon market, read our report entitled ‘Secretive intermediaries’.
   
   A downside of trading carbon credits through an intermediary is the added cost. Intermediaries charge fees or commissions for their services, or sell credits at a mark-up, which can increase the overall expense of purchasing or selling carbon credits. This can reduce the climate benefits of carbon trading and deliver fewer gains to local communities and indigenous peoples. On top of that, the voluntary carbon market is plagued by low financial transparency, leaving stakeholders in the dark on just how much money flows into projects and how much into the coffers of intermediaries.

Retail traders: Traders buy large quantities of credits directly from project developers and sell to other intermediaries for a commission. 

Brokers: Brokers normally buy (and retire) carbon credits on behalf of final buyers. This happens with the addition of a commission fee.

Exchanges: Exchanges are marketplaces on which financial instruments are traded. Brokers are usually able to emphasise the distinctive features of the projects whose carbon credits they sell, whereas exchanges offer standardised contracts. These exchange-based contracts, in addition to promoting liquidity and increasing transaction volumes in the VCM, give buyers confidence that they will receive credits that meet certain criteria. For example, buyers can acquire carbon credits from a specific year from a specific activity type (e.g. renewable energy) but without knowing which exact credit they will be receiving.

However, this commodification encourages a race to the bottom, as all credits in a given contract category will be priced homogeneously, regardless of their quality. If contracts are not sufficiently specific and detailed, then project owners have no incentive to deliver better credits. For example, if an exchange sells a standardised credit for a “nature-based project generating an emission reduction in 2019”, it means any project owner able to sell a credit that meets these features will have access to the contract, regardless of the relative quality of the climate action involved. 

Another unfavourable feature of exchange-based trade is the financial loss incurred by the project owner through commission fees of the exchange platform, though this is typically lower than what brokers charge. Due to the lack of financial transparency, the details of transactions are usually unavailable, making it impossible to determine how much money actually reaches the projects supported. 

Intermediaries, such as traders and brokers, sometimes don’t only charge projects commissions but also add a markup which the buyer pays by selling at a price higher than that agreed to with the project developer. 

There is no limit on the number of times a credit can be traded, nor is there (in most cases) an expiration date on the credits. This means that before a credit is used, it can change hands multiple times, and be sold at different prices to the different parties involved. Other than connecting projects with buyers, this secondary market does not add any climate or environmental benefits.

Existing measures of market size, such as the oft-cited (but now outdated) number of $2 billion in market value, focus on the volume of trades and their price levels, irrespective of who receives the money paid to acquire a carbon credit and for what end. For instance, a market worth €100 could be due to a single credit representing a tonne of carbon dioxide being traded 10 times at €10 or 10 different credits of €10 each changing hands once. Hence, summing up all sales payments and deriving a “market size” from these interactions does not provide useful information about the amount of money truly being channelled towards climate action. A more detailed analysis of intermediaries can be found in our report titled ‘Secretive intermediaries’.  

Spot markets, also known as cash markets, deal with transactions in the here and now (i.e. on the spot). In a spot market transaction, carbon credits are bought or sold for immediate delivery and payment within the designated spot month of the contract. These transactions can occur on exchanges or over-the-counter, but regardless of the location, they involve the immediate exchange of assets at an agreed-upon price.

This contrasts with futures and other derivatives markets, where buyers pay for the option or obligation to acquire goods at a predetermined future date. This occurs through futures or forward contracts. 

In these transactions, the purchase and sale of assets are delivered and paid for at a specified future date.

Derivatives contracts are financial bets on the future price of a given asset, whether it is a carbon credit, a tonne of wheat or a share. The most common derivative contracts are forwards, futures, swaps and options. 

Other forms of financial instruments are equity and debt. Derivatives are commonly used for trading, while debt instruments, like bonds, provide upfront finance which must be repaid later. 

1. Forward contracts are – like futures contracts – financial agreements to buy or sell an underlying asset at a predetermined price on a specified future date. Forwards are traded on over-the-counter markets (see above) and are mostly kept private and customisable, which gives them flexibility.
   
   Forward contracts mostly happen as over-the-counter transactions, which makes them less regulated compared to futures contracts (see  here and here for more context). 

1. Future contracts are – as opposed to forward contracts – standardised and traded on organised exchanges (so-called clearinghouses). The fact that the clearinghouse mitigates the risk that party will default makes futures a safer option for both the buyer and seller.  

Both forward and futures contracts can be either cash-settled contracts or  deliverable-forward contracts. Under a cash-settled contract, the buyer either pays or receives the difference between the contract price and the spot (market) price of the carbon credit on the settlement date (that is, the price difference is paid, and not the price of the underlying asset). In practice, most forward (and swap) contracts are cash-settled, and therefore don’t trade in carbon credits, but in the price differences between the agreed-upon price and the spot market price at the settlement date.  

Under a deliverable-forward/futures contract, the buyer purchases the asset for the contract price, which is – depending on the free market forces at play – either higher or lower than the market price on the settlement date. A deliverable-forward/future contract involves the actual delivery of the carbon credits at the agreed-upon price. 

Both forward and futures contracts allow for hedging (basically dodging price increases on the market through the contract that fixes the price). This is beneficial for the buyer if market prices rise after the deal has been sealed.

A variant form of futures trading is when a buyer places an option on carbon credits. This provides the holder of the contract with the right, but not the obligation, to buy or sell carbon credits at a specified price within a specific period. This allows market participants to hedge against the volatility of carbon credit prices or to speculate on future price movements.

Debt is another instrument for financing carbon crediting projects. By providing loans, financers are providing pre-project investments that facilitate the realisation of carbon crediting projects. 

Bonds are one example of debt finance. The basic idea behind a carbon bond is that an issuer (the project owner) raises funds by issuing bonds, and then uses the proceeds to finance a project that generates carbon credits. The issuer then sells the carbon credits to buyers. The revenue generated from the sale of the carbon credits is then partly used to pay interest and principal on the bonds.

Bonds, which can attract a large pool of funding, are typically longer-term financing tools than carbon credit revenue. Most bondholders don’t want to take a risk on the future price of carbon, and in some cases a contract is signed by a third-party guaranteeing that the price of the carbon credits is sufficient to pay the bond investors. 

Research conducted by AlliedOffsets and commissioned by Carbon Market Watch in 2023 revealed that since 2004, there have been over 250,000 retirement events, with a total of 864 million credits retired, averaging around 3,200 credits per transaction. The findings also showed that industrial projects tend to be retired in larger quantities, indicating demand from bigger buyers, while projects with co-benefits, such as those related to agriculture and energy efficiency (including clean cookstove initiatives), are typically retired in smaller amounts, attracting smaller buyers.

However, transaction sizes on the secondary market also depend greatly on the seller. When dealing directly with the project developer or even a broker or retailer, it is possible for individuals to purchase only a single carbon credit. On public registries, credit purchases are displayed in ‘batches’ which represent a given amount of credits that have been retired by – or on behalf of – one specific beneficiary. Typically, the range of carbon credits in batches varies between hundreds to hundreds of thousands of credits per batch. 

Nonetheless, the display on public registries does not draw a perfect picture since it shows retired batches of credits per project, but a buyer might be buying a range of batches from different projects in one given transaction. There might also be multiple smaller retirement batches for a given project, and carbon credit transactions are not directly visible in VCM registries.