Concept of Carbon Credit Exchange Additionality
Carbon credit exchanges are crucial to the development of the voluntary carbon market and offer a promising alternative to today’s fragmented over-the-counter trading. However, they are inherently complex and require robust technical knowledge to operate efficiently. A primary barrier to their success is the lingering controversy around the “additionality” of certain carbon offset projects, which can have negative environmental consequences and detract from their intended benefits. It is important for businesses and NPOs purchasing carbon credits to understand this controversy and assess the additionality of projects carefully.
The key concept of carbon credit exchange additionality is that a project’s greenhouse gas reduction activities can only be considered additional if they go beyond the business-as-usual scenario and represent a net environmental benefit. This ensures that the carbon credits purchased by organizations do not represent a pass-through of emissions reductions that would have occurred anyway. If a carbon credit exchange is not additional, it is unlikely to contribute to a sustainable low-carbon economy and reduce our impending climate catastrophe.
However, there is no unified international verification process that evaluates the additionality of VCM projects. While private initiatives and individual carbon crediting schemes are developing guidelines for credit quality, a lack of consistent standards for verifying the additionality of VCM projects leaves buyers and traders at risk of buying credits that may not meet their sustainability goals.
While the debate around some projects’ additionality is ongoing, the overall quality of credits offered on carbon credit exchange is improving. A number of nascent technologies such as Direct Air Capture (DAC) and Enhanced Weathering are more likely to be additional than traditional forestry-based projects, and their emergence is raising the bar for the overall quality of credits on the VCM market.
The Concept of Carbon Credit Exchange Additionality
Additionally, the introduction of reference contracts in 2022 will help improve the granularity of carbon credit prices and make it easier to match buyers with sellers. The standardized structure of these reference contracts will also enable the creation of structured finance products to support project developers.
Despite these developments, the current state of the carbon credit exchanges is not ideal. A fragmented and unreliable infrastructure makes it difficult to connect buyers and sellers and facilitate efficient trades. Credits are highly heterogeneous, and the different attributes of each credit are priced in a way that does not align with how buyers value these characteristics. This is a critical barrier to the effectiveness of carbon credit exchanges and their potential for supporting low-carbon economic growth.
In order to address these issues, the industry must establish a more consistent infrastructure for evaluating and validating the additionality of carbon projects and establishing a common language for discussing carbon credit quality. This will require robust project-level due diligence that identifies specific barriers to additionality. This will prevent wasted spend on credits that do not make a real-world impact and help buyers and traders achieve their sustainability goals.