Carbon Credit Exchange
A carbon credit exchange is a mechanism for trading and monitoring carbon emissions. These exchanges are set to play a key role in addressing greenhouse gas emissions. Carbon credits are offsetting products that are traded privately and can be bought and sold by corporations, individuals, governments, and other entities. The market is expected to grow to $2.4 trillion by 2027.
There are two primary types of carbon credit exchange markets. One is voluntary, the other is regulated. Voluntary markets are operated without federal, state, or local oversight. This makes them susceptible to fraud and inefficiencies. However, the voluntary market is gaining in popularity and has been fueled by corporate net-zero goals and the Paris Agreement.
The voluntary carbon market is geographically fragmented. California, for example, has a different carbon credit market in the west than it does in the east. Oil and gas majors, tech companies, and airlines were among the early buyers.
Why Is There a Carbon Credit Exchange?
The carbon market is highly volatile, and pricing varies greatly from one day to the next. For instance, in three weeks, the price of carbon futures dropped over 25 percent. Other factors that affect prices include the availability of credits and how much demand there is for them.
The voluntary carbon market is largely unregulated. It is a competitive marketplace where the primary goal is to reduce or offset the emission of carbon dioxide. Carbon projects are required to provide additional social, environmental, and economic benefits. In order to meet these requirements, a carbon project must follow certain rules and abide by a specific attribute taxonomy.
Traders prefer standardized carbon credit products. Non-standardized products give end buyers more flexibility to inspect the underlying project and protect them from accusations of greenwashing.
A digital process for verifying a carbon project could increase its credibility and shorten the payment process. This would improve the issuance of high-quality credits and reduce their costs.
A carbon credit exchange could also help to increase the liquidity of the broader carbon market. Liquidity is important in promoting transparency and driving scale. Without it, the price of carbon can be difficult to trace, leading to the potential for money laundering.
Many organizations are looking for ways to hedge their financial risks associated with the energy transition. By adopting new operating practices and using innovative technologies, companies can reduce their greenhouse-gas emissions drastically. But they often lack the capital to do so. Investing in carbon credits is one way to make this happen. Companies can purchase and sell carbon credits in the voluntary market, and use them to offset their carbon dioxide emissions. They can do so in the same manner as buying stocks or futures.
Companies can use the voluntary market to finance their own carbon projects, or they can buy from an investor or retailer trader. If the buyer is a government, the credit can serve as a means of fulfilling its climate change obligations. Governments with an early lead on issues of environmental sustainability can gift carbon credits to other nations.