Carbon Credit Exchange Help Fight Climate Change
Many companies struggle to meet their own emission reduction targets and can’t afford to invest in internal programs, so they turn to the carbon credit market. The idea is that by buying credits from a well-designed project elsewhere, they can help address global climate change without incurring the cost of their own compliance activities. But a successful carbon credit exchange requires a lot of effort and trust, especially since the market currently lacks any regulatory oversight or maximum cap on carbon emissions.
The voluntary carbon market is accelerating rapidly, with corporate net-zero goals pushing investor interest. This year, the number of projects is expected to double from last year. But the industry is also struggling with a lack of standardization and market transparency, making it difficult for buyers to distinguish between high-quality carbon credits and those from lower-quality projects. The current situation is not good for either buyers or suppliers.
To create an effective carbon credit exchange, there needs to be a single, trusted source of information on the quality of a particular carbon project and its environmental and market benefits. This would include a set of core carbon principles, curated and hosted by an independent third party and a taxonomy of additional attributes that distinguish credit quality. This would enable the development of liquid reference contracts to help manage price risk and support supplier financing, as well as providing a consistent pricing signal to guide over-the-counter trading.
Can a Carbon Credit Exchange Help Fight Climate Change?
A thriving carbon credit market could serve as an important complement to the majority of climate action that takes place within countries’ borders, according to Article 6 of the 2015 Paris Agreement. In fact, developing countries will need up to US$6 trillion by 2030 to finance the necessary investments in their national climate actions and to meet their greenhouse gas emission reduction goals outlined in their nationally determined contributions (NDCs).
Companies that want to reduce their emissions but are unable to do so at their facilities can purchase credits from another company that is meeting its own targets. The resulting “emissions allowances” can then be sold to other companies.
These projects are largely unregulated and operate in the shadow of the formal carbon market, where governments regulate emissions through caps on the amount of carbon that can be released into the atmosphere and require businesses to buy and sell these permits. The cap and trade program in California, for example, is one of the largest such markets.
A regulated carbon credit market can be more structured and offer better prices and terms for credits, but it also adds administrative costs. This may be why many carbon market players prefer the voluntary marketplace, which operates mainly without any oversight by government regulators and relies on respected standards organizations to validate carbon project quality. There are currently several such groups, but they face challenges in establishing credibility and driving market liquidity. In addition, the industry faces uncertainty over how long carbon credits must be in storage to be considered valid.
