What Does Carbon Credit Exchanges Do?

Carbon Credit Exchanges

Carbon credit exchanges facilitate the buying and selling of credits and offsets that represent greenhouse gas reductions. The concept of carbon credits is fairly straightforward: for every ton of CO2e a company releases into the atmosphere, it can earn or buy credits that reduce those emissions elsewhere, thus neutralizing the impact. In the regulatory market (those that must adhere to caps set by government regulators), companies buy these credits to meet their compliance obligations, while in the voluntary market, individuals and businesses purchase them for environmental benefits.

In the regulatory market, governments create cap-and-trade regulations at the local or regional level. These regulate the number of emissions a polluter can make, but allow them to trade permits with other companies who have more than their share, or are not in compliance with the regulation. This trading leads to a global price signal that incentivizes investment in greener technologies.

As a result, a growing number of companies are participating in the regulatory carbon credit exchange markets and reducing their emissions. This has also created a demand for the voluntary carbon market, where people and companies purchase credits of their own accord to offset their own emissions.

What Does Carbon Credit Exchanges Do?

A large and growing global marketplace of buyers and sellers exists for these carbon reductions, but it’s not very efficient. The main problem is that carbon credits are highly heterogeneous: each one has additional attributes associated with its underlying project, and different buyers value these attributes differently. As a result, matching an individual buyer with a corresponding supplier is a time-consuming, inefficient process that’s often transacted over the counter.

Carbon credit buyers need to know the quality of their purchases, so they must be able to verify the projects that produced the credits. However, the complexities of assessing a project’s impact and its carbon offsets make it difficult to develop a uniform, rigorous verification methodology. Moreover, carbon-reduction projects are often located in remote regions with poor infrastructure, making it challenging to transport the necessary data to carbon credit buyers.

This is why carbon credit exchanges are so important. These platforms provide a mechanism for buyers and sellers to conduct business in standardized carbon contracts with speed, security, and scale. The ability to trade carbon credits on these exchanges will improve liquidity, help match supply and demand, lower transaction costs, and create a platform for innovation in the carbon market.

The first step in creating a carbon credit exchange is to establish standards for the verification of credits. The best way to do this is by combining core carbon principles with a standard set of attributes that will be valued by all buyers. This approach will streamline the matching of buyers with suppliers and lead to a more transparent and efficient carbon market.