GEO versus N-GEO: Investing in the VCM futures market

The voluntary carbon market (VCM) is expected to increase 9-fold by 2030 to around 900 MtCO2e.

But what’s the best way to play the VCM market opportunity? One option is to invest in the project developers, leveraging the growth in carbon tonnages and the potential increase in the price of carbon. That comes with high operational risks though related to the performance of the individual projects.

One other option is to speculate on the price of voluntary carbon credits. It’s been possible to do that in the carbon compliance markets for years, but up until recently investors have not been able to employ a similar strategy in the VCM.

In the last couple of years a number of exchange based futures instruments have been launched catering for the VCM. Well designed futures contracts should aid price discovery, risk management, and be an opportunity for investors wishing to speculate.

However, the fragmented, idiosyncratic nature of the VCM market means that futures contracts might mask many of the important underlying trends. This means that investors need to be very careful they are choosing the right way to play the potential growth in the VCM market.

In this article I look at the various types of futures contract, the exchanges they trade on, the fundamentals underpinning the VCM, and where the best opportunities are for higher prices.