The global carbon market is a massive and complex system with many players. The resulting chaos makes it difficult for companies and individuals to identify trustworthy sources of carbon credits. A carbon credit exchange could make the process much easier, allowing buyers to locate and purchase emission reductions from verified projects that meet their needs.
The carbon market consists of two distinct but interrelated segments: the regulatory market and the voluntary marketplace. The former is mandated by “cap-and-trade” regulations at the national, regional, and state levels. These markets are designed to incentivize businesses to reduce their greenhouse gas emissions by putting a price on the rights to emit carbon dioxide.
To limit global warming to a safe level, many countries will need to reduce their net emissions dramatically. To do so, they will need to use a variety of strategies and technologies, including purchasing and retiring carbon credits. This approach allows organizations to neutralize the residual emissions that they won’t be able to eliminate altogether, and is known as carbon offsetting.
For these purposes, the world’s carbon credit exchange are divided into three categories: verified emissions reduction (VER) credits, certified sustainable forest management (CSFM) credits, and carbon credit offsets. VER and CSFM are based on emissions-reduction projects that have undergone thorough third-party verification, while CO2 emitted from offsetting is derived through a variety of methodologies and is less tightly defined.
Despite their differences, all three types of carbon credits are needed to reach climate goals. To achieve this, a robust, effective carbon market is required. A carbon credit exchange can help connect these markets and improve the overall integrity of the market.
It may be years before a highly controlled, globally regulated carbon market is established, but the agreement at COP26 has laid a foundation for it. In the meantime, existing voluntary and regulatory carbon markets will continue to serve their purpose, connecting buyers and sellers and supporting the development of projects that reduce greenhouse-gas emissions.
One of the key issues is that today’s carbon market lacks consistent trading liquidity. This is largely due to the fact that carbon credits are highly heterogeneous, with each credit having unique attributes influencing its price. A uniform set of core carbon principles and a standard attribute taxonomy would streamline the matching of buyers and suppliers, allowing both parties to access the right reductions at the right price.
Another improvement is finding ways for buyers to signal their future demand for carbon credits. This could take the form of commitments to buy a certain number of credits, or up-front agreements with project developers to purchase emissions reductions in the future. This can encourage project developers to increase supply, bolstering the overall quality of the market.
While the carbon credit exchange concept is still in its early stages, a pilot project is currently under way to establish an online carbon trading platform called the Carbon Trade eXchange (CTX). This new spot exchange features an open architecture and welcomes participants from all corners of the industry, from single brokerages and project developers to global conglomerates. The CTX will also provide a variety of services beyond carbon trading, including carbon footprinting and project finance consulting.