When buying any alternative asset such as voluntary Carbon Credits, it’s the smart purchaser
that completes their full due diligence prior to buying. Follow these 10 simple points to make sure you don’t get caught out.
1) Due Diligence
2) Credit Standard
3) Verified
4) Spot vs. Forwards
5) Paying for your credits
6) Guaranteed Returns
7) Exit Strategies
8) Timescales
9) Regulation
10) Common Sense
Note: In the voluntary carbon market VERs (Verified Emission Reductions) / VCU (Verified Carbon Units) REDD ((Reducing Emissions from Deforestation and Forest Degradation) are all commonly known as “CARBON CREDITS”.
COMPLETE FULL DUE DILIGENCE
All verified carbon credits are registered on a global central database called the Verified Carbon Standard http://www.v-c-s.org/ Via this website you are able to download and view all the due diligence documents from the project description, issuance certificate to the validation and updated monitoring reports. When dealing with a company presenting carbon credits to purchase, they should be able to give you the project name and the project number so you can visit the database prior to committing to research the project yourself.
CARBON CREDIT STANDARDS
The three main standards we’d recommend in the voluntary market is VCS (Verified Carbon Standard), GS (Gold
Standard) and REDD (Reducing Emissions from Deforestation and Forest Degradation) – we would not recommend
buying pre-validation credits due to the risk of the unknown, unless you are an experienced carbon credit buyer.
Standard) and REDD (Reducing Emissions from Deforestation and Forest Degradation) – we would not recommend
buying pre-validation credits due to the risk of the unknown, unless you are an experienced carbon credit buyer.
MAKE SURE THE PROJECTS ARE VERIFIED
We do not advise buying into projects that have not been fully verified and validated, future promises of credits to be
awarded on a new project are too speculative and should be avoided in our opinion.
awarded on a new project are too speculative and should be avoided in our opinion.
SPOT vs. FORWARDs
Are you forward buying? If so, beware that both pricing and delivery risk is important, also when buying forward credits
the company you purchase from should also be FSA regulated to deal in forward purchasing deals as they become a
derivative under FSMA 2000. As an example we at GMO only deal in Spot Trades where your credits are delivered
immediately and never forward deals.
the company you purchase from should also be FSA regulated to deal in forward purchasing deals as they become a
derivative under FSMA 2000. As an example we at GMO only deal in Spot Trades where your credits are delivered
immediately and never forward deals.
PAYING FOR YOUR CREDITS
To whom are you making your payment? It should go DIRECT to the provider / seller of the credits and NOT a third
party escrow company, agent or similar, we always recommend dealing with a UK based company and UK bank
account.
To whom are you making your payment? It should go DIRECT to the provider / seller of the credits and NOT a third
party escrow company, agent or similar, we always recommend dealing with a UK based company and UK bank
account.
GUARANTEED RETURNS
What, if any, returns have you been promised? Remember carbon credits are spot trades and there are no fixed of
guaranteed returns.
guaranteed returns.
EXIT STRATEGIES
Ask about the exit strategy, how and when can your credits be sold? Are there any additional costs? What is the
timescale to dispose of your credits?
timescale to dispose of your credits?
TIMESCALES
Buying and holding carbon credits in anticipation of a price increase, you should view this as a medium to long-term
hold. This market is immature therefore there may be a significant difference between the buying and selling price
especially if you sell in the early stages. As a new growing market, it is also illiquid, so selling your credits quickly
may be difficult until the market matures.
hold. This market is immature therefore there may be a significant difference between the buying and selling price
especially if you sell in the early stages. As a new growing market, it is also illiquid, so selling your credits quickly
may be difficult until the market matures.
REGULATION
Voluntary carbon credits for immediate delivery are not classified as a specified product under FSMA2000 and
therefore this market is not regulated by the FSA, no company can apply to be regulated by the FSA to deal in
voluntary carbon credits nor do they need to be. This doesn’t mean its not worth consideration, however it does mean
you should follow this guide prior to making any purchase and only buy carbon credits with your ‘eyes wide open’
having looked into any risks appropriately.
therefore this market is not regulated by the FSA, no company can apply to be regulated by the FSA to deal in
voluntary carbon credits nor do they need to be. This doesn’t mean its not worth consideration, however it does mean
you should follow this guide prior to making any purchase and only buy carbon credits with your ‘eyes wide open’
having looked into any risks appropriately.
COMMON SENSE
When considering the purchase of carbon credits, one should not view this as a “get rich quick scheme” and it should
be viewed as a medium to long-term play, most importantly, if it sounds to good to be true… it usually is!
be viewed as a medium to long-term play, most importantly, if it sounds to good to be true… it usually is!
To learn more about buying verified carbon credits, the carbon trading market or the types of projects where carbon
credits are generated, why not visit our website http://www.gmouk.com/ and for daily updates relating to the carbon
trading market follow us on Twitter GMOcarbon
Published by GMO - Green Market Opportunities Ltd - May 2012.
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