How Do Carbon Credit Exchanges Work?
Carbon Credit Exchanges Work
Carbon credit exchanges are online marketplaces that connect buyers and sellers of verified greenhouse gas (GHG) credits. One credit is equal to one tonne of CO2 reduced, stored or avoided. GHG emissions are the primary contributor to global warming, so reducing their amount is crucial to mitigate climate change. The market for carbon credits is both voluntary and regulated. The regulated market is controlled by compliance schemes, such as the European Emissions Trading System (ETS). The voluntary market is independent of these schemes and allows companies to buy carbon credits to offset their own GHG emissions.
As more companies set ambitious goals for reducing their own greenhouse-gas emissions, there’s a growing need for a robust voluntary market in which to trade these carbon credits. Such a market would transmit reliable signals of buyer demand, encouraging players already involved in the market to increase their supplies of these carbon credit exchange.
Putting a price on carbon is not an easy task, however. This is because the types of projects that issue carbon credits differ widely, generating credits with different properties and at different prices. The heterogeneity of the market means that daily price signals can become inconsistent and unreliable.
How Do Carbon Credit Exchanges Work?
To address this issue, some market participants have come together to create carbon credit exchanges that link the supply and demand of these credits. They function much like any other commodity exchange, with brokers and retail traders linking up to provide services for end users. These exchanges bring together multiple players – from NGOs and project developers to large financial institutions – into a single platform that facilitates transactions between them.
Aside from reducing the cost of buying and selling carbon, these exchanges also help to make the transaction process more transparent and accountable. For example, a trader can use these platforms to check the identity of a seller, confirm their compliance with governmental or industry regulations, and verify that the purchased carbon credits have been verified. The transparency provided by these platforms is important to the integrity of the market, ensuring that all participants operate ethically and comply with regulations.
The main goal of a carbon credit exchange is to encourage businesses to reduce their own emissions by providing them with monetary incentives. This is accomplished by allowing them to purchase credits from other companies that have achieved a lower level of emissions. This is a method that has proven to be effective in driving behavioural change in the business world.
The best carbon credit exchanges are able to offer high-speed, secure and scalable trading infrastructure. In addition, they have built a reputation as trusted marketplaces for the sale and purchase of verified carbon credits. They have a wide range of products available and are used by the biggest buyers in the industry, including airlines, utilities and oil and gas firms. In fact, some of these platforms have become so popular that they are even being used to settle large bilateral deals negotiated offscreen.