Carbon Credit Exchanges Real

With a growing emphasis on climate change, carbon credits have become a popular market among individuals and businesses. But are these exchanges real? And if so, how do they work?

The concept behind these carbon credit exchange markets is simple. Credits are created by projects that reduce or remove greenhouse gas (GHG) emissions in one place to offset GHG emissions produced elsewhere. These projects can be voluntarily based or in compliance with government-mandated programs. They can be located anywhere in the world. Typically, a company that emits GHGs will purchase these credits to cover its emissions. This is called offsetting, and it is done in order to meet a company’s own net-zero commitment or to comply with government regulations.

A variety of factors influence the price of a credit, including its type of underlying project, vintage and delivery date. Some of these projects also generate additional ‘co-benefits’ and help to meet UN Sustainable Development Goals, such as improved welfare for the local population or better water quality. This can increase the value of the credit and cause it to trade at a premium to other credits.

Are Carbon Credit Exchanges Real?

There are two main types of carbon credit markets: a regulated market and a voluntary market. The regulated market is made up of entities that need to buy carbon credits in order to comply with government-mandated emission reduction programs. This includes energy utilities, power producers and large industrial companies, as well as airlines.

Regulatory carbon trading exchanges are designed to streamline and speed up the process of buying and selling carbon credits, as well as to ensure that buyers are getting their credits from a reputable source. Currently, the regulated carbon market is fragmented, with different players using their own platforms. This can make it difficult to transmit clear demand signals, which are vital in developing liquid carbon markets.

As the regulated carbon market continues to grow, it will be important for these platforms to standardize products in order to promote liquidity and provide reliable daily price signals. One way to do this is by creating “standard products” that guarantee certain specifications, such as a specific type of underlying project, a vintage and a delivery date. Xpansiv CBL and ACX have both developed these standards, which allow traders to trade credits that are guaranteed to meet specific requirements.

Another approach to promoting liquidity in carbon markets is by allowing traders to use tokens. The tokens can be traded on a digital carbon credit exchange, which functions just like a traditional commodity trading platform. Traders can also use the tokens to buy and sell carbon credits directly from the projects that grant them. Increasingly, these transactions are taking place in the form of carbon tokens enabled by blockchain technology. This is a new and rapidly developing area of the carbon credit market.