These are awarded to organisations which have removed a quantity of carbon dioxide from the atmosphere, through, say, tree planting or building a wind farm, by the EU or other authorities with newer ETSs such as the US and China.
The EU ETS was badly undermined for years because many industries were exempted, free allowances to polluters were issued, and the market was flooded by cheap offsets.
The political pressure to act on climate change has increased immensely since 2018, when Extinction Rebellion launched and Greta Thunberg’s School Strike for the Climate got underway.
This means more demand for voluntary offsets and the prospect of tougher ETS cap rules that will lead to more mandatory offsets in the near future, all of which has encouraged traders to bid up carbon prices.
There has generally been huge investor interest in what the financial community calls ESG , which is broadly about ethical business.
This reflects the financial community’s view that electrified greener transport is here to stay – and probably also the billions of dollars Tesla receives from more polluting automakers needing to buy carbon permits from greener rivals.
Yet at the same time, there is clearly a lot of speculation at play.
Natural gas has been in short supply worldwide, triggering more use of coal.
There is a lot of double-counting going on, in which those buying and selling offsets both count them as reducing carbon emissions, and there are other loopholes, particularly in questionable carbon offsets.
The integrity of these markets will be even further challenged as the various regional ETSs seek to link up to create more global carbon trading.
At a time when higher energy prices are squeezing businesses, they have an added incentive to push for a global carbon-trading system that goes easy on them.
As for the price of carbon, I expect speculators to keep pushing up carbon prices as long as there is enough liquidity in the market – meaning credit they can borrow to make trades.
If just a fraction of all the QE money would have been spent on climate goals, we would have made a lot more progress with climate mitigation over the past decade.