How To Put a Price on Carbon: What Goes Into Determining the Price per Tonne of a Carbon Project?

In the voluntary carbon market, carbon emitters voluntarily pay to offset unavoidable emissions by investing in high-quality carbon credits from carbon-reducing projects across the globe. According to Ecosystem Marketplace, the total market value for voluntary carbon market transactions in 2021 was nearly $2 billion, which represents a quadrupling in market value since 2020. Nearly 350 million carbon credits were issued in 2021 alone, as more companies set ambitious net zero targets in line with the Paris Agreement, and shareholders and investors continue to push for ESG performance.

Research indicates that companies that buy carbon credits also tend to lead in climate action by engaging in decarbonization efforts. And, by paying for carbon credits companies promote the understanding that the environmental externality of emitting carbon has a cost that affects the bottom line.

So how much does a company pay for one carbon credit - representing a tonne of carbon? The answer: it depends. Companies don’t get to determine the price of their carbon credits themselves. Instead, they purchase credits that have been verified against a scientific methodology, issued by a Carbon Crediting Program and listed on a secure registry. From there, carbon brokers, traders and nonprofits will connect projects with interested buyers.

The first influence on price is the middleman: be sure to know the cost per credit charged by the person trading that credit and ask about commissions and the cost per credit paid to the project. Beware a second or third-hand sale where most of the value of the credit is not with the project developer but with the middlemen.

The price of a carbon credit can be dramatically affected by whether the carbon emissions are reduced or removed. Reduction offsets are generated by activities that prevent emissions from ever reaching the atmosphere with actions like installing clean cookstoves that cut fuel use and avoid burning and releasing CO2 or that avoid the conversion of grasslands to croplands that release enormous amounts of CO2 from the soil. Removal offsets actively, verifiably remove carbon from the atmosphere and include planting trees, creating biochar, mineralizing CO2 and other experimental methods.

There is controversy over which is better: the IPCCC recommends preventing as many emissions as possible but also recommends that, in a transition over the next 25 years, it will become more important to remove CO2 than to avoid it. For now, we follow this ideal: We need everything.

Many quality projects have co-benefits - meaning they help the local community with human development and improved infrastructure as well as contribute to lowering carbon emissions. These benefits can also influence the cost of a carbon credit. The age, or “vintage year,” of the credits can also influence price; generally, credits that have been issued more recently are more expensive.

Price can also be influenced by the project location. Carbon-reducing projects can come from all over the world, and they are embedded in different communities and economies, which will naturally make one project cost more than another.

Scarcity of one type of credit can also affect the price. For example, it takes a great deal of upfront investment to plant and grow a forest; and emission reductions may not be able to be counted until 7-10 years later. Although a wonderful nature-based solution to climate, for obvious reasons this makes this credit type scarce.

Some removal technologies in early stages can be very expensive but companies may want to be at the forefront of a particularly innovative form of nature conservation or carbon reduction and may be willing to spend more per credit. For example an exciting project that sucks CO2 out of the atmosphere and pumps it underground to mineralize the CO2 has obvious technological costs which are reflected in the price. Early-stage support for these kinds of technologies also promotes and helps drive down future costs.

Lastly, some companies are motivated by investing in a carbon-reducing project that’s available in their local community, and are willing to pay a higher price to do so.

Regardless of cost per credit, it is important to ask questions about how the proceeds from the sale of carbon will be used. As a rule of thumb, we believe that 20-25% should be compensation for the project developer and help pay costs of documentation, testing, monitoring and verification. The rest should go to the project for project operations and community benefits.

“Pricing can be a confusing subject for people who are new to the voluntary carbon market. Many expect that the cost of one particular tonne of carbon will always be equivalent to the cost for any other particular tonne of carbon, and that’s simply not the case,” says Jodi Manning, VP, Director of Marketing & Partnerships for Cool Effect. “Cool Effect is here to help individuals and businesses navigate the complexity of pricing. The factors that influence the price will continue to change but our dedication to price transparency will not.”

Cool Effect supports only projects with pricing transparency, backed by science, and rooted in integrity. All of Cool Effect’s projects are verified by a leading carbon crediting program and come with additional co-benefits. To learn more about Cool Effect or how to partner with the organization to develop a meaningful sustainability and carbon offset program, please visit cooleffect.org/for-business.