A carbon credit exchange connects buyers and sellers of carbon credits. It is a platform where companies can purchase carbon credits to offset their own emissions or meet their climate goals. Carbon credit exchanges list credits on the market, facilitate trading and work with registries to enable transactions. They can be found in North America and Europe.
Carbon credit buyers may buy directly from a project developer or through a retailer. In either case, the purchaser receives a credit in an account in a carbon credits registry. Carbon credits can then be transferred between accounts and retired or used. Retailers often develop their own projects to generate credits for sale. Retailers may also acquire credits from the wider marketplace through brokers or directly from a carbon crediting program.
Credits are typically issued in the context of a government-regulated program known as a cap and trade system. In these programs, regulators set a limit on total emissions – the cap – which decreases over time. If a company emits more than its permitted limit, it must purchase credits from other companies to stay below the cap. Purchasing and selling these credits in the market – called trading – avoids penalties comprised of fines and extra taxes.
The carbon.credit market is accelerating in response to corporate net-zero goals and international climate goals, including those contained in the Paris Agreement. As a result, the voluntary carbon market has grown to encompass thousands of individual projects worldwide. But the growth of this market has created challenges for participants, including the need to improve the quality and liquidity of carbon credits available in the marketplace.
Currently, the majority of carbon credits sold in the voluntary market are issued through a variety of different programs and have differing quality criteria. This diversity is a key reason why today’s voluntary carbon market lacks the liquidity needed for efficient trading. A more streamlined market would create a foundation for sustainable carbon trading. To that end, a standard set of attributes — known as core carbon principles — should be established. Those attributes could then be organized into a common taxonomy, creating a reference contract for carbon trading.
Carbon credits are based on avoided emissions or enhanced removals from projects that reduce greenhouse gas levels. In order to be eligible for issuance, these activities must be measured using methodologies that are approved by the carbon crediting program. The vast majority of methodologies are developed by project developers, but some buyers also get involved in methodology development. This can be a resource-intensive and risky strategy, however, as it requires the commitment of time and resources to design and implement a new methodology.
The development of a centralized carbon credit exchange could simplify the process of matching buyers and suppliers. A standardized attribute taxonomy and reference contracts would make it easier for buyers to find the best credits for their needs, while increasing the availability of finance for carbon project developers.