A carbon credit exchange is a marketplace where businesses and individuals buy, sell and retire carbon offsets to meet environmental standards. The exchange is a growing part of the carbon market. It offers businesses a convenient way to purchase credits that they need for compliance and a source of reliable information on the carbon credit market.
Carbon markets operate differently in different jurisdictions and for different reasons. There are two kinds of carbon markets: cap-and-trade and voluntary. In a carbon.credit exchange market, companies that produce too much pollution have to offset that excess with allowances. Then they can trade their extra allowances with other companies that are producing less emissions than they are allowed to. The goal is to limit total emissions to a certain level, which limits the amount of greenhouse gas pollution.
To achieve that goal, governments around the world have introduced various caps on pollution. These caps set limits on how much a company can emit and then gradually decrease over time to encourage companies to reduce their emissions. Depending on the jurisdiction, there are also caps that apply to an individual industry or even to all industries. These caps can be regulated by government and include penalties for companies that don’t comply.
As the world’s temperature rises, it is increasingly clear that carbon emissions are contributing to the global climate crisis. To limit the increase in temperature to 1.5 degrees Celsius, which is the target set by the Paris Climate Accord, most industries must dramatically cut their emissions. They can do this through new technologies, energy sources and operating practices.
However, these efforts can be difficult and expensive. Many businesses find it challenging to identify and purchase credits from reputable suppliers that can help them meet their own goals. The challenge is that the voluntary carbon market is heterogeneous in nature and lacks a uniform pricing structure. It also has a limited capacity to transmit price signals to buyers.
One solution would be to develop reference contracts. These reference contracts would establish a consistent daily price for a given type of carbon credit and other attributes, thereby creating a starting point for the negotiation of over-the-counter (OTC) trades.
Resilient and scalable infrastructure, including a clearinghouse and meta-registry, would support the listing and trading of reference contracts. These infrastructure elements would also support post-trade activities, such as market integrity assurance, supply-chain financing and data.
A more standardized approach to carbon trading would make it easier for buyers and sellers to locate credible sources of credits and to complete transactions. This would reduce transaction costs, increase transparency and enhance liquidity on exchanges. The voluntary carbon market is a promising opportunity to address climate change. But it needs to be built in a sustainable manner and with the right partners.
In order to succeed, the voluntary carbon market will need to improve three areas: participant eligibility, participant oversight and market functioning. These improvements will create confidence in the integrity of offsets and ensure that carbon markets function efficiently and safely.
