Carbon credits are becoming more popular as individuals and corporations seek to invest in projects that reduce greenhouse gas emissions. This trend is expected to grow further as companies set net-zero goals and become aware of the potential financial benefit of investments in green initiatives.

Carbon credit exchanges are places where investors can buy and sell standardized contracts that have the same features as other securities. The main goal of these exchanges is to connect carbon sellers and buyers in a more efficient manner than through traditional private conversations or over-the-counter trades. They also aim to make the market for carbon credits more accessible and liquid.

Investors who choose to purchase and trade carbon credit exchange are typically investing in either the compliance or voluntary markets. Compliance markets are developed and controlled by mandatory national, regional or global carbon reduction systems (for example, a cap-and-trade system). Voluntary carbon markets function independently of compliance systems and allow businesses and individuals to freely buy carbon offsets without planning to utilize them for compliance purposes in the future.

There are several different types of carbon credits that can be purchased. Each is associated with a specific type of project, and some are more valuable than others. The cost of a credit depends on its quality and how much it is in demand.

The quality of a carbon credit is determined by the standards it adheres to and its ability to produce verified emission reductions. In the voluntary market, standards are established by a variety of third-party organizations and independent auditors. The Verra Carbon Standard is one of the most widely accepted standards and aims to improve transparency in carbon credit trading. It requires the use of accounting methodologies that are specific to the project type, a centralized registry system and independent auditing.

Credits that meet these standards can be bundled into portfolios and sold to end consumers for a fee. These portfolios are usually marketed with the name of a certified carbon project and a logo that indicates the project has been verified by a reputable independent body.

Some companies are trying to create a new market for carbon credits by encouraging people to plant trees instead of driving cars or using electricity, in order to generate credits they can sell to corporations. The problem is that this new market is not necessarily based on genuine environmental or social benefits and can be very risky for the average investor.

Investors should approach any carbon credit investment with a long-term plan in mind. It can take a while to earn these credits and they are often worth more than their face value, so making rash decisions based on short-term market fluctuations could be costly. Those looking to invest in this sector should consider working with a financial advisor who can help them find an appropriate carbon credit investment strategy for their particular circumstances. SmartAsset’s free tool can match you with advisors who serve your area.