Who Generates Carbon Credit Exchanges?
Generates Carbon Credit Exchanges
Carbon markets are often categorized into two separate parts: the regulatory market where companies with emissions caps buy credits to stay within their limits and the voluntary market where businesses and individuals purchase credits to offset their own greenhouse gas emissions. The latter includes everything from reforestation projects to putting carbon dioxide back into the ground as part of soil management.
Both markets are important, but they serve different purposes. Regulatory markets are mandated by government, such as the California cap-and-trade program that requires companies to buy and sell carbon credits in order to cut their emissions below state levels. The voluntary market is more of a marketplace that links supply and demand, similar to other commodity markets. The major players in this marketplace are the brokers and retail traders who link carbon credit suppliers to end buyers.
A key component of this process is the verification of carbon credit exchange, which is done by third-party verifiers such as Gold Standard. These companies review and approve carbon credits before they can be sold on the market, and they also offer a range of other services like project development and investment advice.
The carbon credit price is influenced by many factors, including the type of the underlying project that issues the credits, the vintage (the older the vintage the lower the credit price), and the geography. However, there is a growing concern that prices do not fully reflect the economic value of the impacts produced by carbon projects. In particular, carbon credits from community-based clean cookstoves projects that deliver life-saving health benefits to women and children tend to trade at a premium when compared with other types of projects.
Who Generates Carbon Credit Exchanges?
Despite these challenges, there is no doubt that the global marketplace for carbon credits continues to grow. This growth has been spurred on by corporate net-zero goals and by the increasing interest in meeting international climate targets set out in the Paris Agreement.
In order to keep up with this growth, it’s important to have a strong infrastructure that connects the two sides of the carbon market. That’s why carbon credit exchanges are a great way to link supply and demand.
Carbon credit exchanges help connect investors and projects together in a safe, transparent and efficient manner. They also provide a valuable signal to the wider marketplace that the prices of carbon credits accurately reflect their real market value.
To make this happen, there needs to be liquidity in the market that allows for a clear price signal, and this can be achieved by creating liquid reference contracts. These would be hosted and curated by an independent third party organisation with a defined attribute taxonomy to classify the quality of credits.
The Xpansiv CBL and ACX carbon exchanges both operate this way. Their standardized products ensure that the carbon credits being traded have certain characteristics, such as the underlying project type, the vintage, and certification from a limited group of standards. This helps to reduce the number of bilateral deals negotiated offscreen that need to be settled through the exchanges, making them an increasingly viable alternative to traditional over-the-counter trading.