Carbon Credits And ETS: How They Work And What Investors Need To Know
Carbon credits and emissions trading schemes (ETS) have become some of the most visible mechanisms used to reduce emissions while attempting to preserve economic flexibility.
Supporters view them as one of the more practical tools available to encourage decarbonisation. Critics question whether they deliver genuine environmental outcomes or simply shift emissions around the system.
Regardless of opinion, carbon markets are becoming increasingly difficult for investors to ignore.
What Are Carbon Credits And Why Do They Exist?
Carbon credits are tradable units representing a verified reduction, avoidance or removal of greenhouse gas emissions.
In Australia, one Australian Carbon Credit Unit (ACCU) represents one tonne of carbon dioxide equivalent reduced or removed from the atmosphere. (1)
The concept exists because emissions create costs that are often not fully reflected in prices paid by businesses and consumers.
Carbon markets attempt to attach value to emissions reduction. The theory is that if reducing emissions creates economic benefit, capital and innovation are more likely to flow toward lower emissions activities. (2)
Carbon credits are generated through approved projects and can then be purchased by governments, corporations or other market participants.
Projects can include vegetation regeneration, landfill methane capture, industrial efficiency improvements and agricultural initiatives.
What Is An Emissions Trading Scheme (ETS)?
An emissions trading scheme, commonly referred to as an ETS, expands on the carbon credit concept.
Rather than rewarding individual projects alone, an ETS creates a broader framework where emissions become part of commercial decision making.
Participants either reduce emissions directly or acquire eligible credits.
Globally, most ETS structures operate as either:
• Cap and trade: a total emissions limit is set and participants trade allowances.
• Baseline and credit: participants operate below assigned limits and generate credits.
Australia does not currently operate a broad economy wide ETS.
Instead, Australia’s closest equivalent is the Safeguard Mechanism. (3)
The Safeguard Mechanism applies to facilities producing more than 100,000 tonnes of carbon dioxide equivalent annually.
Covered facilities operate under declining emissions baselines. Operators exceeding those levels must reduce emissions or obtain eligible units to remain compliant. (4)
While not formally labelled an ETS, the commercial effect increasingly resembles one.
Carbon Credits In An Australian Context
Australia’s carbon market has developed significantly over the last decade.
The ACCU Scheme remains the country’s primary carbon credit mechanism and is administered by the Clean Energy Regulator.
Projects are required to follow approved methodologies and satisfy integrity requirements before credits can be issued.
Examples operating in Australia include:
Human induced regeneration
Encouraging native vegetation recovery.
Carbon farming
Generating reductions or carbon storage across agricultural operations.
Landfill gas capture
Collecting methane before atmospheric release.
Industrial efficiency projects
Reducing emissions intensity through operational improvements.
Australia’s market infrastructure has also evolved.
Carbon units are administered through the Unit and Certificate Registry, which replaced the earlier Australian National Registry of Emissions Units and supports ownership, transfers and administration of units. (5)
Trading activity remains smaller and more specialised than traditional sharemarkets, but participation has continued to broaden.
The Criticisms And Challenges For Investors
Carbon markets remain controversial.
One criticism is that carbon credits may reduce urgency for businesses to lower emissions directly. (6)
Another criticism centres on additionality.
Additionality asks whether the project would have proceeded anyway. If so, critics argue the environmental benefit can be overstated.[6]
There are also concerns surrounding permanence, particularly for land based projects where environmental outcomes may change over time.
Measurement and verification remain areas of debate because estimating emissions that never occurred is inherently difficult.
Australia responded to these concerns through the Independent Review of Australian Carbon Credit Units led by Professor Ian Chubb.
The review concluded that the ACCU framework remained fundamentally sound while recommending stronger governance, transparency and integrity controls. (7)
For investors, the challenge is broader than environmental outcomes alone.
Carbon markets can be influenced by policy adjustments, methodology revisions, pricing volatility and liquidity limitations.
How Investors Can Gain Exposure
There are several pathways for investors seeking exposure to carbon credits and emissions trading schemes.
The first is through listed companies that participate in carbon generation, environmental services, project development and emissions reduction activities.
The second is through exchange traded carbon products available internationally.
Examples include exposure linked to markets operated by the Intercontinental Exchange and European Energy Exchange, which support trading activity across emissions and environmental products.
Some investors gain direct exposure through registry accounts and specialist market access.
In Australia, holding and transferring ACCUs requires participation through the government registry infrastructure.
Globally, direct participation often requires access to specialist carbon market platforms, registry accounts, brokerage arrangements and software systems that facilitate environmental product execution and reporting.
Private markets also provide opportunities through ownership of projects generating carbon credits or supporting emissions reduction infrastructure.
Retail investors should also recognise that direct access to carbon credits and emissions trading schemes is not always straightforward.
Unlike listed equities, carbon markets were largely designed around institutional users, project operators and compliance participants rather than individual investors.
There are several reasons for this.
First, access often requires registry accounts, identity verification and administration processes that can feel unfamiliar to investors used to online brokerage accounts.
Second, many carbon markets operate through specialist brokers, over the counter transactions or institutional trading arrangements rather than open retail exchanges.
Third, liquidity can vary significantly. Carbon units may not trade with the same frequency or transparency as shares listed on public exchanges.
There are also practical considerations around custody, settlement, taxation treatment and understanding methodology risk.
Finally, carbon pricing itself can be influenced by government policy, regulatory settings and methodology changes, making the investment case more difficult to assess than traditional listed securities.
As a result, many retail investors access the theme indirectly through listed companies, exchange traded products where available, specialist managers or diversified investment vehicles rather than purchasing carbon units directly.
One example is the EnviroInvest Investment Fund, which seeks exposure across environmental opportunities including carbon markets, carbon abatement, environmental infrastructure and broader transition themes within a diversified investment approach.
The Bottom Line
Carbon credits and emissions trading schemes were designed to create financial incentives for emissions reduction while allowing economic flexibility.
Australia has gradually developed a framework that supports project creation, carbon pricing mechanisms and market participation.
Like any developing market, challenges remain around integrity, transparency and long term economics.
For investors, carbon markets are unlikely to be simple.
But understanding how they operate, how they are traded and where opportunities sit may become increasingly valuable as environmental capital markets continue to develop.
References
1.Clean Energy Regulator, Australian Carbon Credit Units, 10 November 2025.https://cer.gov.au/schemes/australian-carbon-credit-unit-scheme/australian-carbon-credit-units
2. Department of Climate Change, Energy, the Environment and Water, Reducing Emissions. 01 April 2026. https://www.dcceew.gov.au/climate-change/emissions-reduction
3. Department of Climate Change, Energy, the Environment and Water, Safeguard Mechanism, 14 April 2026. https://www.dcceew.gov.au/climate-change/emissions-reporting/national-greenhouse-energy-reporting-scheme/safeguard-mechanism
4. Clean Energy Regulator, Safeguard Mechanism. 13 April 2026 https://cer.gov.au/schemes/safeguard-mechanism
5. Clean Energy Regulator, The New Unit and Certificate Registry, 10 November 2025. https://cer.gov.au/online-systems/new-unit-and-certificate-registry
6. Twidale, S. Reuters, Around one third of carbon credits fail new benchmark test, 6 August 2024.https://www.reuters.com/sustainability/around-third-carbon-credits-fail-new-benchmark-test-2024-08-06/
7. Department of the Prime Minister and Cabinet, Office of Impact Analysis, Independent Review of Australian Carbon Credit Units (Chubb Review) https://oia.pmc.gov.au/published-impact-analyses-and-reports/chubb-review-australian-carbon-credit-units
Important Information
EnviroInvest Pty Ltd ACN 685 107 957 (“EnviroInvest”) is an Authorised Representative of Daylight Financial Group Pty Ltd ACN 633 984 773 (“DFGPL”) which is the holder of an Australian Financial Services Licence (AFS Licence No. 521404).
Information in this commentary is current as at date prepared unless otherwise stated. However, please bear in mind that investments can go up or down in value, and that past performance is not a reliable indicator of future performance. For more Important Information please refer to the Disclaimer section of this website.
This communication may contain general financial product advice. It has been prepared without taking into account your personal circumstances, and you should therefore consider its appropriateness in light of your objectives, financial circumstances and needs before acting on it.
If our advice relates to the acquisition or possible acquisition of a particular financial product, you should obtain a copy of and consider the Information Memorandum (IM) or Product Disclosure Statement (PDS) before making any decision.