Carbon Credit Exchanges Work

Voluntary carbon markets, where companies and other organizations can compensate for or remove emissions they cannot eliminate themselves, help support the global climate agenda. However, they need to scale up to meet ambitious greenhouse-gas reduction goals.

Market-based solutions, spanning the entire carbon credit exchange value chain—including buyers, sellers, and project developers—would support this goal. Moreover, a strong, efficient voluntary market would help businesses and governments reduce greenhouse-gas emissions by providing a reliable way to identify trustworthy suppliers of offsets. Currently, voluntary carbon credits are traded largely unregulated. This has helped them grow quickly, but it also poses challenges to the integrity of the system.

The heterogeneity of the voluntary carbon market—the range of credits it contains, with varying attributes associated with each one–makes it difficult to trade them efficiently. This inefficiency also means that it is hard for market participants to find credits whose qualities align with their needs. A more uniform taxonomy of credit attributes, defined in terms of core and additional features, would make it easier for buyers and suppliers to match. This would allow them to find a credit that meets their requirements and ensure the integrity of the market.

Do Carbon Credit Exchanges Work?

Common standards for quality and validation, standardized in an easily understood language, could also provide a basis for market integrity. These standards could include accounting methodologies specific to each project type and independent auditing, as well as a registry system to verify that credits are valid.

Voluntary markets for carbon credits enable organizations to compensate for or neutralize emissions that they cannot eliminate on their own by financing projects that reduce or avoid emissions from other sources or that remove greenhouse gases from the atmosphere. A robust, effective voluntary carbon market would play a critical role in helping companies achieve net-zero or net-negative emissions goals.

Currently, the global voluntary carbon market is characterized by low liquidity, limited financing, and inadequate risk-management services. This environment impedes the growth of high-quality credits and raises concerns about market integrity. The carbon market is also characterized by heterogeneity, which increases the potential for errors and fraud. In addition, it is prone to price transparency issues and money-laundering risks.

To prevent these problems, the carbon market needs a robust, trustworthy digital process for registration and verification of carbon projects. Such a process could lower costs for project developers, shorten payment terms, accelerate credit issuance and cash flow, and improve credibility of corporate claims related to offsets.

Developing such a system is essential to ensure that the requisite quantity of credits meets the needs of buyers. A market-based matching mechanism that matches sellers and buyers based on multiple parameters can help ensure this. A robust voluntary carbon market should offer a range of products that meet the needs of different types of end buyers. Standardized products (such as forward delivery) are preferred by traders and financial players in anticipation of skyrocketing demand, while non-standardized offerings are preferable by end buyers who wish to customize their purchases.