Environmental commodities: How do we trade them

Environmental commodities are a new and remarkable asset of the global commodities market. They are exceptional as their value comes from reducing pollution, making clean energy, and protecting nature.

In this guide, we will look closely at environmental commodities. We will explain what they are, the different types available, the factors influencing their prices, and how we can trade them.

What are environmental commodities?

Environmental commodities are assets developed through sustainable practices and represent the environmental benefits of those procedures.

These commodities can take various forms, including carbon credits, renewable energy certificates, and water rights.

The underlying principle behind trading environmental commodities is incentivising and rewarding sustainable practices while providing a market-driven approach to ecological conservation.

Types of Environmental Commodities

Carbon credits

It is one of the most well-known environmental commodities. These are units of measurement representing a reduction or removal of one metric tonne of carbon dioxide equivalent (CO2e) from the atmosphere.

These credits can be bought and sold in the voluntary or regulated markets, enabling companies and individuals to offset their carbon emissions and contribute to climate change mitigation efforts.

Renewable energy certificates (RECs)

RECs represent the environmental attributes of clean energy generation, such as reduced greenhouse gas emissions and decreased reliance on fossil fuels. Renewable energy sources, such as wind, solar, or electricity, generate RECs.

These certificates can be traded and purchased by entities looking to claim the environmental benefits associated with renewable energy.

Water rights

A distinctive category of environmental commodities, water rights serving as legal claims that confer the privilege to access and utilise water resources for many purposes.

These purposes include agricultural irrigation, industrial operations, and municipal water supply, forming the lifeblood of many regions.

The value of water rights emerges from their role in optimising the allocation of precious water resources. Through a system of trading and exchange, these rights facilitate a dynamic mechanism where individuals, businesses, and communities can buy, sell, or lease water entitlements.

This process ensures that water is distributed effectively, responding to changing needs and circumstances while fostering sustainable water management practices.

4 price influencers of environmental commodities

Several factors influence the price of environmental commodities, making their trading a dynamic and complex process. It includes market demand and supply, regulatory frameworks, technological advancements, and market perception.

1. Market demand and supply

As society places greater importance on sustainable practices and being responsible stewards of the environment, the desire for trading environmentally friendly commodities grows. This heightened demand can exert upward pressure on the prices of these commodities, particularly when their availability is restricted or limited.

For instance, when more people and businesses seek to offset their carbon emissions or trade in cleaner energy sources, they surge the demand for carbon credits and renewable energy certificates.

If there aren’t enough environmental commodities to meet this increased demand, their prices can rise as buyers compete for the limited supply. This relationship between supply and demand is a fundamental driver in shaping the pricing dynamics of environmental commodities.

2. Regulatory frameworks and policies

When policymakers implement more stringent emission reduction targets or establish carbon pricing mechanisms, it can directly impact the demand for carbon credits.

For example, shifts in regulations related to renewable energy generation can also profoundly affect the value of renewable energy certificates. Governments introducing policies promoting renewable energy sources can stimulate greater interest in these certificates, raising their market value.

Conversely, policy changes that reduce support for renewable energy may lead to decreased demand and lower prices for these certificates. Thus, the regulatory landscape is crucial in determining the dynamics of environmental commodity prices.

3. Technological advancements

As renewable energy technology continues to evolve, with enhancements like boosting the efficiency of solar panels and creating more cost-effective wind turbines, the cost of producing renewable energy decreases.

This reduction in production costs can influence the worth of renewable energy certificates, potentially making them more accessible and affordable to a broader range of stakeholders.

4. Market perceptions

The way people feel about the market is important. When more people become aware of and interested in taking care of the environment, it can bring in more investors. It can make prices go up because more people want to buy environmental commodities.

On the other hand, when people don’t believe that environmental commodities work effectively or are risky, it can make fewer people want to buy them. This lower demand can make prices drop because there are fewer buyers. So, how people feel about environmental commodities can affect how much they cost.

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Environmental commodities vs. traditional commodities

Let’s analyse the distinctions between energy commodities and their conventional counterparts. We will explore factors like trade volume, pricing trends, and market reach.

Market trade volumes

Environmental commodities, like carbon credits and others, often see less buying and selling than trading oil, gold, or farm products. There are a few reasons for this. One is that environmental commodities are new, so fewer people are involved. Also, the market for these commodities is smaller.

For example, in 2020, the European Union Emissions Trading System, the biggest carbon market globally, saw around 9.3 billion carbon allowances traded. In contrast, the gold market traded over 331,000 metric tons in the same year. This big difference in trading shows that the two markets differ regarding how much they’re bought and sold.

Price patterns

Environmental commodities often have their prices go up and down because of rules and climate-related things. For example, the prices for carbon in the European Union’s Emissions Trading System (EU ETS) have gone up and down when they made new climate rules, like the Market Stability Reserve (MSR) in 2019.

But for traditional commodities, it’s different. Their prices are usually affected more by the economy, world politics, and how much there is and how much people want them.

Market reach

Major investors like pension funds and insurance companies have taken their time before trading in environmental commodities. It is due to a few things that have made them cautious.

One is that the rules in this market can be complicated. Also, they worry that it might be hard to turn their acquisitions into cash quickly, and there are few standard financial products yet.

But things are changing. Investors and traders are increasingly thinking about sustainability and looking at things like how a company treats the environment and society when making trading decisions. It has made them more interested in environmental commodities, even though they’re still getting used to them.

Future trends in environmental commodity trading

The future of environmental commodity trading is expected to continue expanding, influenced by various trends:

• Expanding carbon markets: Carbon markets are going global, with more places using carbon pricing and emissions trading systems. It will create new chances for trading carbon credits and make them easier to buy and sell.
• Rise of sustainability initiatives: Sustainability efforts, like corporate social responsibility and eco-friendly certifications, are becoming more popular.

Many businesses and investors trade environmental commodities like carbon credits or renewable energy certificates (RECs) to show they care about the environment. It will boost the demand for these commodities and encourage green practices.

• Tech integration: Technology is making environmental commodity trading easier. Digital platforms and online brokers are making it easier for people to trade these commodities. This tech integration will make trading more efficient and accessible.

How to trade environmental commodities

You can trade environmental commodities through various derivatives, including:

Contract for differences (CFDs): It is a contract between two parties, typically a trader and a broker, where they agree to exchange the difference in the value of an asset from when the contract is opened to when it is closed. These contracts allow you to speculate on the price movements of various underlying assets without owning them.

You can trade environmental commodities on online CFD platforms. An award-winning and most-trusted trading platform since 2009, markets.com offers more than 1,000 financial instruments, including commodities for traders of any level.

Swaps: Environmental commodity swaps involve the exchange of cash flows based on the price or quantity of commodities, such as carbon credits or renewable energy certificates (RECs). Swaps can help manage price risk or achieve specific objectives related to environmental commodities.

Certificates and warrants: These financial instruments represent ownership or entitlement to specific quantities of environmental commodities. Certificates and warrants are often used for physical delivery in commodity markets.

Expand your trading knowledge with this related article: How to trade or invest in gold: a beginner’s guide

Learn more and trade energy commodities at markets.com

Environmental commodities have emerged as new valuable assets in the global market. Supply and demand, regulatory frameworks, technological advancements, and market perceptions influence these commodities. Keeping informed about these aspects will give you precise trading decisions.

Environmental commodities exhibit notable differences from traditional commodities primarily because they are relatively newcomers to the global market. Despite these disparities, it’s foreseeable that as the market develops, environmental commodities will become a mainstream asset everyone engages in trading.

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When considering "Commodity CFDs" for trading and price predictions, remember that trading CFDs involves a significant degree of risk and could result in capital loss. Past performance is not indicative of any future results. This information is provided for informative purposes only and should not be construed to be investment advice.