Alternative Option: Voluntary Carbon Credit

Does this thing have something to do with CO2 emissions, net zero targets, and sustainable investment? The answer is yes, but now you think how it is related to investments.

Let's start by understanding what voluntary carbon credit (VCC) is: Carbon credit, also known as carbon offsets, is a market-based mechanism designed to incentivize and facilitate the reduction of greenhouse gas (GHG) emissions. Working towards diminishing the impact of climate change in recent years has led to many innovative solutions focusing on reducing carbon emissions and promoting sustainability. VCC is one way for governments, corporations, and individuals to offset their carbon footprint by purchasing these carbon credits from issuers, where your proceeds will help the issuer invest in a project that is aimed to reduce the CO2e, even without reducing emissions from their end.

We can see it as a new investment avenue as the National Stock Exchange of India is investigating new ways to trade this commodity in the derivatives market (a financial instrument that derives its value from underlying asset 'VCC') that help investors to hedge against price volatility and can efficiently manage their carbon offsetting strategies. It can take the form of futures, options, and swaps that provide opportunities for investors with different risk appetites and fund sizes to participate. It helps to empower the investors by contributing to a low-carbon economy; currently (Aug 2023) there are 26 million voluntary carbon credits available in India, which defines the market's potential as they are valued at $150 million.

Previously, due to unregulated non-compliance, there was a lack of scrutiny in this market. Then with the incorporation of the Integrity Council for the Voluntary Carbon Market (ICVCM), which made and published its Core Carbon Principles benchmark, which defines high-quality credits consisting of 10 standards. It examines the integrity of the carbon-crediting programs and based on that evaluation, VCC receives a rating of high or low quality through which price discovery happens.

Finding the best alternative to achieve targets should be the goal for any socially responsible investor.

About the author,

    Sudhanshu Mehta

A student from the batch of 2022-24. A curious mind from Udaipur who loves things related to finance and technology. An adventure enthusiast who loves to travel and make new friends.

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