According to the Zhitong Finance APP, the commodity trading giant Trafigura Group is preparing for record growth in the troubled carbon credit market, betting that a new regulatory framework will drive carbon credits to become mainstream in emission accounting.

Hannah Hauman, global head of carbon trading at Trafigura, stated that in various jurisdictions, the increasing regulations aimed at controlling emissions are reshaping the carbon credit market. She recently stated in an interview in Azerbaijan that this development means a product that was once seen as an 'enterprise experiment' will now join the ranks of 'investment-grade assets and businesses.'

The use of carbon credits by companies to offset their emissions has become one of the most controversial areas in climate finance. Accusations of 'greenwashing' surfaced repeatedly last year, while the value of voluntary carbon trading markets plummeted by 23% as bankers and businesses withdrew.

HSBC Holdings has currently shelved plans to establish a carbon credit trading and finance department. Shell (SHEL.US) is taking steps to sell the majority stake in its nature-based carbon credit project portfolio. Companies like Delta Air Lines (DAL.US), Google under Alphabet Inc. (GOOGL.US), and EasyJet Plc sponsored ADR have exited the market.

Regulators in Europe, the USA, and Asia have all recognized that without a well-functioning, effective carbon credit market, especially one based on removal credits, many businesses will be unable to achieve net-zero emissions before the mid-century. All three regions are developing frameworks to achieve this goal.

During the 29th Conference of the Parties (COP29) on climate change held in Baku, Azerbaijan's capital, negotiators reached an agreement to advance new market rules guided by the United Nations. Under the so-called 6.4 provision, there is a UN-supported global credits mechanism. Additionally, there is guidance on how countries calculate their exchanged carbon emissions units as they work towards national climate goals, known as the 6.2 provision.

Homan said the decision on Article 6.4 is a "huge" development. She said, "It basically provides a rulebook of rubber stamps for countries around the world, telling them how to participate in the market."

At the same time, carbon market experts and climate activists urge caution. Danny Cullenward, senior researcher at the Kleinman Energy Policy Center at the University of Pennsylvania, said Article 6.2 focuses on how countries can exchange so-called international transfer mitigation outcomes to help achieve their climate goals, which seems to be a market of "anything goes."

The market has been designed to allow countries to set their own high-quality credit standards. Cullenward said the Baku Agreement has now turned the originally intended "multilateral accounting system" into a "carbon trading system." He said this could undermine the better-designed Article 6.4 market and wider climate action.

Carbon credits were supposed to represent 1 ton of carbon emissions avoided, reduced, or removed from the atmosphere. They are sold by developers investing in projects such as reforestation, typically in developing economies. Companies purchasing credits then claim to have offset their emissions. However, studies have found widespread instances of projects issuing more carbon credits than deserved.

Tok is the world's largest carbon emissions credit trader, which has had to face the negative impacts of questionable projects in the past. In 2023, the company became one of a group of companies holding what Homan referred to as "stranded assets."

Homan said that with the implementation of new regulations, Tok now needs to develop new carbon credit projects to address the growing demand. "All our markets are like this," she said.

Homan pointed out that companies facing emission reduction pressures now have a "regulatory view of what they expect from now until 2030." She said, "They can plan, price, and procure" "They can then invest and adjust capital accordingly."

So far, the main factors affecting the carbon market are not the usual supply and demand dynamics that affect commodities, but policy developments and greenwashing impacts. Meanwhile, the legal definition of carbon credits worldwide remains inconsistent, adding to the pricing complexity. These risks are enough to make major banks struggle to establish themselves in the market.

This has created opportunities for traders like Tok and the company has reached a new trade. Earlier this month, it announced an agreement to provide a $0.5 billion guarantee for a new carbon credit project to restore the Miombo forest that spans southern and central Africa.

Homan said the new regulatory background is "changing the entire pattern of market behavior".