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The top 5 reasons businesses overpay for carbon credits


Cover image asking "The top 5 reasons businesses overpay for carbon credits?".

Carbon credits are one of the key tools available to mitigate runaway global carbon emissions, which grew 6% in 2021 alone. McKinsey argues that accelerating the adoption of carbon credits and their associated carbon markets will be necessary to keep global temperature rise below 2 degrees this century. However, although carbon credits are increasingly seen as a useful tool in the mitigation hierarchy (something we explored in this article), it is hard to know how much they are worth and what value you are getting from the carbon credits that you buy.


 

Unlike other commodities markets, there is no universal price feed for carbon credits. This means there is no single quoted carbon credit price per tonne, even when you are looking at similar types of projects. This makes the market difficult for buyers to navigate, as carbon credit prices vary greatly across different brokers, platforms, and resellers.


This carbon credit price per tonne comparison snapshot for October 2022 – which quotes carbon credit prices from Klima Infinity and three web-based alternatives’ platforms – illustrates how much prices vary for the same projects across multiple online platforms:


Comparison of on- and off-chain carbon credit prices.

There are multiple drivers of these differences in price per tonne. Here are five of the biggest issues that could be causing your business to misjudge carbon credit prices – and what you can do to overcome these challenges.

1. Opaque markets and unreliable price discovery

Stylized image highlighting the disadvantages of opaque markets.

The flow of funding from individuals and organizations (carbon emitters) to climate-action projects often takes place through the Voluntary Carbon Market – where carbon emitters purchase the credits issued by climate-action projects, in order to help them get off the ground and scale up their pro-climate activities.


Since its inception in the 1990s, the Voluntary Carbon Market has been highly fragmented. Carbon exchanges exist, but they are not interconnected and not open for everyone to participate in. Purchasing carbon credits happens in over-the-counter transactions between carbon emitters and resellers or brokers, with each transaction happening in isolation. Many of these resellers and brokers have a sleek web-based user interface, but operate the same over-the-counter model in sourcing the credits. This creates two problems:

  • Price discovery is difficult: A broker or trader in one place could offer you a different price than a different broker or trader. You don’t know if the price you pay for a carbon credit is fair unless you devote time and resources to laborious price and quality comparisons – which are bound to be incomplete due to gated access.

  • Not everyone can participate freely: Access to carbon-trading markets is restricted, and smaller companies and individuals may not meet qualifying criteria. This distorts the true value of carbon credits, as markets need a high number of participants to accurately assess the value of a commodity.


2. High fees and margins

Stylized image highlighting the disadvantages of high fees.

Because transactions in the Voluntary Carbon Market mostly take place over the counter, there are multiple intermediaries involved. It is likely that any credit purchased by your business has already changed hands several times.


Naturally, these intermediaries demand payment for their services, which results in fees that get passed along to your organization. As per research from Allied Offsets, these fees can reach up to 200%, surpassing the actual value of the underlying carbon credit. So, while a climate-action project may be receiving revenues at $1–2 per carbon tonne, you would likely be paying a price over $10 per tonne when sourcing that credit from a carbon broker or a web-based platform. Furthermore, according to BFA Global, 40–60% of a carbon credit’s price can go to market intermediaries, meaning only a small fraction is left for those actually producing the carbon credits.


3. Variety and stratification of carbon credits

Stylized image highlighting the disadvantages of lack of carbon credit variety via traditional trading methods.

If pro-climate project developers are earning $1–2 per carbon tonne, and you as a business are paying over $10, you might think to go direct to projects and acquire their credits at a fair price for both them and for you. However, this task would be monumental to execute in terms of time and resources expended, which explains why brokers and resellers have traditionally played an important role in the Voluntary Carbon Market.


Project developers can be issued credits by multiple validation and verification bodies (such as Verra, Gold Standard, and American Carbon Registry, among others), and these bodies use dozens of different methodologies to assess climate impact (Verra, for example, has over 50 methodologies currently active in its catalog).


As a result, the carbon credit market can be sliced and categorized in many ways. This variety and stratification is crucial to help increase the scope and impact of the Voluntary Carbon Market, but for individual buyers it makes it impossible to navigate and judge how much the price of a certain type of credit from a specific project should be.

4. Limited carbon credit availability

Stylized image highlighting the disadvantages of limited credit availability.

Your business likely has a climate strategy and execution plan defined by the time it comes to sourcing carbon credits. You may be looking to support local projects, or projects located in the regions where you source raw materials.


This is great progress. However, the availability of such specific carbon credits in legacy markets is limited and broker dependent. Certain platforms only stock credits of certain types of projects – as shown by our carbon credit price per tonne comparison above.


Even assuming that a platform, broker, or reseller stocks those specific credits, the credits may not be available in the quantity that you require to meet your carbon offsetting goals. A low supply and high demand can lead to an inflated price that you end up paying – when other similar projects may have been available to source credits from that you were not aware of.


5. Resource-intensive documentation

Stylized image highlighting the disadvantages of too much bureaucracy.

Finally, over and above the actual price per tonne of a carbon credit, your business has to factor in the additional resources, time, and physical costs that come from implementing and showcasing your climate strategy.


The most common way for organizations to retire carbon credits is to use a carbon broker. Once the broker makes the carbon retirement on your behalf, they will need to hire an auditing firm to verify the carbon retirements. In most cases these auditing firms are backlogged, sometimes over 2-3 years – resulting in a significant time lag between your climate action, and your ability to actually showcase your impact.


Larger organizations may have teams with dozens of employees who meticulously research and track their offsets to produce lengthy reports, which ultimately do not follow an established, open standard. Every organization handles this task in their own way, which makes comparison difficult. This means many hours that could be spent in a more productive way are wasted, and clients and investors are left in the dark about your corporate climate impact.


Once you actually purchase and retire carbon credits to offset emissions, it may take weeks, or even months, to finalize the transaction and receive a document – usually in paper or PDF form – to attest to your completed offset. Showcasing this to your business stakeholders will require stakeholder education, and the investment of time and resources to communicate your actions in a way that resonates with them. There is certainly more to a carbon credit than the face value price that you pay.


Overcoming these challenges: How your business can pay a fair price for carbon credits

In summary, there are five main drivers putting you at risk of overpaying for carbon credits:


1. Opaque markets and unreliable price discovery

2. High fees and margins

3. Variety and stratification of carbon credits

4. Limited carbon credit availability

5. Resource-intensive documentation


These challenges are fundamental structural issues within the traditional Voluntary Carbon Market that the Regenerative Finance – or ReFi – sector has now emerged to solve. ReFi uses Web3 technology rails to create a liquid Voluntary Carbon Market running on blockchain infrastructure, where price discovery is instant and real time, the need for fee-takers is minimized, and showcasing your climate action is instant and transparent. The frontrunner among ready-to-use Web3 solutions is Klima Infinity, a one-stop solution to calculate, implement, and amplify your climate strategy.


Klima Infinity empowers you to avoid overpaying for carbon credits through:


1. Transparent markets and instant price discovery

Rather than credits passing across multiple brokers’ desks, climate project developers are able to turn their carbon credits into tokens and deposit them into tokenized carbon liquidity pools. These pools combine similar types of carbon credits, enabling buyers and sellers to easily and near-instantly transact them. As a result, trading volumes establish a constant, real-time, reliable price tag for carbon credits. Sourcing carbon credits via Klima Infinity gives you access to a real-time price quote.


2. Low fees and margins

As these tokenized carbon credits are held in liquidity pools, your business can acquire them directly, bypassing middlemen. Klima Infinity gives you access to a low-fee environment, where KlimaDAO’s carbon retirement aggregator takes a small 1% fee, unlocking up to 88% discounts per carbon tonne versus competing non-Web3 solutions.


3. A one-stop shop for different carbon credit types

With the tokenized carbon credits aggregated on transparent, public blockchains, your business can benefit from a consolidated market overview. The Klima Data Carbon Dashboard, for example, provides an overview of over 25 million carbon credits. These credits are grouped into tokenized carbon pools, and can be acquired through Klima Infinity in just a couple of clicks.


4. Abundant supply of carbon credits

The Web3-driven Voluntary Carbon Market is growing – and 25 million tonnes of carbon credits are already available to purchase and offset. This abundant supply helps to keep carbon credit prices lower until those carbon credits are retired from the market when used to claim offsets. KlimaDAO’s goal is to accelerate funding to climate-action projects. When more businesses can easily access and engage with carbon credits, more climate projects will in turn be incentivized to supply carbon credits as a vital source of financing.


5. Seamless showcasing of your climate impact at no extra cost

When you source and offset carbon credits via Klima Infinity, your transaction is immediately recorded on a public blockchain. This comes with multiple benefits:

  • Your climate impact is available for display via your free-to-use Climate Pledge Dashboard. This showcases (immutably) which pro-climate projects you have supported, when, how often, and more – such as how the Liechtenstein Bankers Association are doing.

  • You are able to display Proof of Carbon Offset via a climate impact badge, to incorporate on your website or app.

  • There is no need for an audit, or any of the associated time lags. Proof of retirement is on the blockchain, saving you time and money.

  • You receive marketing and amplification support from the ReFi community, for example by having your Love Letter to the Planet displayed to the world.

Avoid overpaying for carbon credits: get a carbon credit price quote using Klima Infinity, and take the first step to achieving climate-positive impact.




Disclaimer: The information provided in this blog post pertaining to KlimaDAO (“KlimaDAO”), its crypto-assets, business assets, strategy, and operations, is for general informational purposes only and is not a formal offer to sell or a solicitation of an offer to buy any securities, options, futures, or other derivatives related to securities in any jurisdiction and its content is not prescribed by securities laws. Information contained in this blog post should not be relied upon as advice to buy or sell or hold such securities or as an offer to sell such securities. This blog post does not take into account nor does it provide any tax, legal or investment advice or opinion regarding the specific investment objectives or financial situation of any person. KlimaDAO and its agents, advisors, directors, officers, employees and shareholders make no representation or warranties, expressed or implied, as to the accuracy of such information and KlimaDAO expressly disclaims any and all liability that may be based on such information or errors or omissions thereof. KlimaDAO reserves the right to amend or replace the information contained herein, in part or entirely, at any time, and undertakes no obligation to provide the recipient with access to the amended information or to notify the recipient thereof. The information contained in this blog post supersedes any prior blog post or conversation concerning the same, similar or related information. Any information, representations or statements not contained herein shall not be relied upon for any purpose. Neither KlimaDAO nor any of its representatives shall have any liability whatsoever, under contract, tort, trust or otherwise, to you or any person resulting from the use of the information in this blog post by you or any of your representatives or for omissions from the information in this blog post. Additionally, KlimaDAO undertakes no obligation to comment on the expectations of, or statements made by, third parties in respect of the matters discussed in this blog post.

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