The carbon credits market is booming, expected to reach a total traded value of US$1.6tn by 2028. It is also volatile and prone to scandal. Despite this, commodity traders are increasing their investments, banking on their compliance expertise to minimise the risk. Isaac Hanson reports.
Carbon credits are an unusual type of commodity. They aren’t physical, so they don’t need to be shipped or stored in the same way as oil or grain. They also operate in a largely unregulated environment, making their exact value hard to gauge and subject to fluctuations even after purchase.
There are key similarities to traditional commodities, though. Carbon credits represent a physical asset, and so require quality control, verification and project management. They are consumable.
They are also in high demand by some of the largest companies in the world.
For Hannah Hauman, head of Trafigura’s carbon trading business – one of the industry’s largest – they aren’t all that different from the oil she used to trade.
“We see market inefficiencies and risks that need to be absorbed for clients to be able to facilitate transactions,” she tells GTR.
Sellers naturally want prepayments and flexibility in delivery volumes, while buyers prefer to pay after delivery with guarantees on price and volume.
“A trader’s value in the market comes from where there are large, liquid and inefficient markets that need risks absorbed. That is the same in this market as any other,” Hauman says.
Trafigura is betting big on carbon. Hauman says her desk has gone from almost nothing three years ago to trading over 100 million carbon tonne-equivalent credits a year.
In 2024, it participated in several major projects in the industry, including the November 2024 announcement of a US$100mn investment partnership with Temasek into a reforestation project in Colombia that intends to issue credits as soon as this year.
Trafigura isn’t the only trader getting in on the action. Vitol has been in the carbon market for 19 years, and trades similar volumes to Trafigura.
In 2023, Mercuria created a US$500mn investment vehicle to develop carbon credit-generating projects and last year was involved in the first trade of a new futures derivative based on Australian carbon credits.
Glencore does not publicly disclose the size of its carbon trading desk, but says in its 2024-2026 Climate Action Transition Plan that its carbon solutions teams are “actively trading carbon”, including carbon credits.
It also says its carbon team has begun to “develop our pipeline of carbon credit projects”, suggesting Glencore also intends to produce its own credits.
The trader did not respond to a request for further comment.
What are carbon credits, and why do traders want them?
A carbon credit is a representation – theoretically – of one tonne of carbon that has either been removed from, or prevented from entering, the atmosphere.
These credits are issued to projects ranging from reforestation to cookstove improvements and technologies that pull CO2 out of the air, often in the tens or hundreds of thousands of tonnes.
The carbon credit market is divided into two sectors: voluntary emissions reductions and government-regulated schemes, such as Australia’s safeguard mechanism and the EU’s emissions trading system.
Before a carbon credit project can be set up, detailed documentation must be submitted to a regulating body – either private or governmental – explaining its scale and scope. Crucially, this includes an estimate of how many carbon credits the project will generate, typically calculated annually, though some projects assess this across their entire lifecycle.
Independent auditors periodically verify the project’s performance, ensuring the actual emissions reductions align with the projections. Based on these results, credits are issued accordingly.
The credits can then be sold on digital marketplaces to businesses looking to reduce their reported emissions. In theory, a company that buys enough credits to offset its whole carbon footprint can label itself carbon neutral without making any changes to its operations.
In practice, however, climate experts say that they should only be used for so-called hard to abate emissions, which include those from shipping or aviation. But even based on that definition, the market for credits is huge. Bloomberg New Energy Finance estimated in February last year that the total value of carbon credits could reach US$1.1tn by 2050 “if integrity issues in the offset market are resolved”.
Maintaining integrity is something that carbon markets have struggled with, historically. Due to its relatively unregulated nature, the voluntary market in particular has been prone to scandal.
Forest conservation and reforestation-based credits known as Redd+ were the largest in the market prior to a Guardian-led investigation that found 90% of them were likely to be worthless, leading demand to shrink for the first time in 2023.
More recently, the most popular credit type – those based on the distribution of clean cookstoves in developing countries – is currently at the centre of a similar controversy following a study in January 2024 that suggested they were overvalued by 900%.
This is why Trafigura prefers to work with government-regulated credits.
“In Australia, for example, they have an agreed set of methodologies and of credits,” Hauman says. “Over time, the government is changing these definitions, either to improve them or to redirect capital to new types of projects. In those instances, the government is very clear; you [the carbon credit generator] have line of sight in the future, and know [the government] is going to discontinue projects under the old methodologies going forward. That doesn’t actually change the status of the existing credits, but it allows the system and the program to move on.”
“It’s very similar to what we have seen in oil markets over the last 30 years,” she says.
Because these credits are backed by the government, they are less likely to be found invalid after the fact, Hauman says.
This is vital for traders, as one of their key functions in the market is to take on the risk that would otherwise be borne by end users, who often lack the resources to independently verify claims about the credits – and they have been burned before.
Bloomberg reported in 2023 that Vitol was holding 75 million credits from a failed UN carbon trading scheme created through the 1997 Kyoto Protocol, which crashed from highs of €25 per credit to almost nothing in the space of three years.
Achieving scale
Another concern in carbon markets is lead time. Large-scale projects, especially those that aim to remove carbon from the atmosphere by regrowing forests, are expensive to set up and slow to bring returns.
“There’s a huge hurdle to create investment-grade projects,” Hauman says.
Many of the projects Trafigura – and other traders – are involved in are in the Global South, where land is cheaper and the need for finance more urgent.
Operating in less developed markets poses its own challenges, though, and questions have been raised by NGOs including Amnesty International, as well as UN representatives, over potential indigenous rights abuses in forestry projects.
“Strong safeguards, including an effective grievance mechanism, are required to ensure carbon markets don’t become a barrier to the climate action we need to ensure protection of the planet and human rights,” Amnesty’s advisor on indigenous rights Chris Chapman said in April last year.
There is also uncertainty that these projects will last long enough to be effective. Eucalyptus trees, often chosen for reforestation projects due to their rapid growth – including by Trafigura – pose a significant fire risk.
Native to Australia, the trees have evolved to both survive and promote wildfires as a way to outcompete other vegetation. This adaptation involves shedding flammable bark and leaves and producing oils that intensify fires. While this strategy works in their natural habitat, where ecosystems are adapted to frequent fires, it can have devastating consequences in regions lacking those natural defences.
As a result, some organisations have raised concerns about the use of eucalyptus in reforestation programmes, questioning whether their benefits outweigh the potential environmental and safety risks.
A report by NGO Swiss Eye released last November noted that Trafigura’s Colombian project had to manage close to 200 fires in a two-month dry spell in 2023. The report cast doubt over the project’s long-term viability, stating “whether the trees will actually survive the expected 30 years is a completely open question”.
The planted area was ultimately unharmed by the fires, and Trafigura told GTR at the time that the project “has invested significantly in rigorous fire management and control measures, including firebreaks, equipment, and trained teams”.
Hauman says the project is securing a non-recourse commercial banking facility, making it the largest nature-based removals project to do so.
A major part of this success, she argues, has been Trafigura’s rigorous governance and operational expertise, vital for a project in a market as fraught as carbon.
“We’ve had 11 different visits this year, from separate auditors,” Hauman adds.
Aside from the required due diligence, the company has hired an independent inspector to monitor the project alongside the project operator and deployed its own specialist team in Colombia that performs manual inspections. It is also working with biodiversity company Nature Metrics to test soil and microbiome health and a digital monitoring specialist to provide high-resolution aerial imagery and analysis.
“It looks like a large-scale asset, so not that different to what we’d see in some of our other operations globally, where an inspector is the default and always assumed to be alongside whenever there’s an operation or an asset or manufacturing process,” says Hauman.
Until the credits are issued later this year, it remains uncertain whether all this effort is worth it. But if the payoff is as high as Trafigura clearly expects, it could soon find the market much more crowded than it currently is.
