Carbon emissions are the greenhouse gases emitted from the burning of coal, oil and natural gas – collectively known as fossil fuels.
As a result, we’ve got global warming.
A carbon credit is a standardised permit that allows the holder to emit one tonne of carbon dioxide – or another greenhouse gas.
Each company or nation is given a certain number of credits that allow them to emit a certain amount of carbon.
But the system was a mess.
So, at the Glasgow Cop26 climate summit in November 2021, it was agreed that a global carbon credit market would be created with higher-quality credits and more stringent rules.
As a result of the growing popularity of EUAs, the futures have become the new choice for individuals who want to make profits and hedge risks across carbon market conditions.
Unlike other futures contracts – where the buyer receives the underlying asset upon expiry – the buyer of an EUA would have the legal obligation to surrender their contracts commensurate to the amount of greenhouse gases they produced in the year.
This makes the carbon market fairly unique because the aim is for it to become obsolete once companies no longer have any need to buy carbon credits.
When the economy is healthier, industrial production increases as the demand for infrastructure, housing starts and consumer products grows.
The carbon market also tends to see the most liquidity – and most stable pricing – in December, as there is a clearer view of companies’ actual annual emissions as the end of the compliance period approaches .
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