In the voluntary carbon market, companies, individuals, and organizations can buy or sell carbon credits. These are generated by projects that remove greenhouse gas emissions. Companies can also purchase credits to offset their own emissions. This form of trading has become popular in recent years as a way to reduce environmental impact.
The first carbon credit exchanges began as part of the 1997 Kyoto Protocol, which set the first international greenhouse gas reduction goals. Since then, the carbon credit market has grown rapidly. Today, the market is worth $211.5 billion and is expected to grow at a 31% CAGR through 2027.
The earliest buyers of carbon credit exchange include oil and gas majors, airline companies, and tech firms. But these companies often face a lack of transparency in the projects that they purchase. A standardized carbon product, in which the project’s environmental and social benefits are well-defined, can help protect these end users.
Carbon exchanges offer a platform for buyers and sellers to do business in real time. They also provide a spot market in allowances. Normally, carbon prices are quoted in Euros per ton of CO2e. However, other greenhouse gasses can also be traded as standard multiples.
Carbon credits are available in four currencies – EUR, GBP, USD, and AUD. These tokens can be custodied by a recognised clearing house. ACX, an innovative carbon exchange, uses distributed ledger technology to create securitized carbon credits. ACX has plans to offer futures on carbon credits as commodity derivatives in the future.
There are two primary submarkets in the carbon market: a regulated carbon market and a voluntary carbon market. In a regulated market, the exchange is governed by government laws. Countries must meet specific emissions limits. Those that fall short may sell their excess units to other countries. If they do not, their projects can be certified.
To qualify for carbon credits, a project must be approved by a third-party body. These bodies verify the project’s objectives and the volume of the emissions it is able to offset. Carbon projects must also contribute to other co-benefits. Typically, community-based projects are more expensive to certify, and may trade at a premium to industrial projects.
Carbon projects can be created by a national or local government, or an individual, company, or organization. Whether the project is private, community, or public, it must be in line with the legal requirements of its jurisdiction. Also, the project must be compliant with a standardized, independent certification method.
Some of the carbon credit exchanges in operation today are: AirCarbon Exchange, which launched in Singapore in 2019, and CTX, which has locations in Asia, Europe, and the US. The CTX has a minimum trading volume of 100 tons of CO2e. Unlike other carbon exchanges, its credits are available in GBP, EUR, and AUD.
AirCarbon Exchange recently raised a total of $3.6 million in funding through three rounds of fundraising. Its client base is composed of 130 organizations. Although it is only in its early stages, its investors include Deutsche Borse, the investment arm of the German Federal Reserve.
