Carbon Credit Exchanges Are Generated
Carbon credit exchanges generate revenue by facilitating the trading of carbon credits that represent greenhouse gas emissions reductions or removals. They allow businesses and individuals to offset their own emissions with credits from outside the market, thereby meeting environmental sustainability goals without cutting actual company output. A carbon credit’s value depends on its underlying emission reduction or removal activity. These may take the form of switching from fossil fuels to renewable energy, converting a corn field into a forest, or protecting biodiversity.
Carbon markets are generally divided into two significant segments. One, the compliance carbon market, is set up by national, regional and global regulations. Companies that exceed their permitted emission limits must purchase and surrender credits to the regulator to avoid heavy fines. The other, the voluntary carbon market, is a non-regulated market that allows participants to buy and sell carbon credits on their own accord.
A growing number of governments and corporations have set corporate net-zero goals, requiring them to eliminate their greenhouse-gas emissions entirely. For many, this will involve purchasing and retiring carbon credits generated by outside activities. The supply of these credits is generated by a number of sources, including private entities that develop carbon projects and governments that develop carbon standards. Demand for the credits comes from individuals and organizations seeking to compensate for their carbon footprint, companies with corporate sustainability targets, and financial players looking to profit.
How Carbon Credit Exchanges Are Generated
Current carbon credit markets are fragmented and inefficient. Matching buyers and suppliers is difficult, as the quality of carbon credits varies widely. This variation is due to a lack of common quality criteria, inconsistent accounting and verification methods, and insufficient information on the credits’ attributes, such as co-benefits (such as community economic development or biodiversity protection). Additionally, buyers often do not know which credits will best meet their needs, forcing them to buy a large volume of credits at once, which is costly for suppliers and exacerbates price volatility.
A key to reducing this inefficiency is improving the flow of market-based signals. Carbon-credit buyers need clear and standardized demand signals to drive investment in more projects, which will ultimately reduce the cost of carbon credit exchange. This could be accomplished by implementing standardization and disclosures on both the quality of a credit and its additional attributes. The development of a reference contract that combines core carbon principles and standard attributes into a single taxonomy would make it easier for buyers to find and select the credits that best meet their needs.
Nasdaq is partnering with Climate Impact X (CIX) to build a carbon marketplace using its scalable, secure trading technology. The platform will be built to scale as the market grows, allowing for new asset types and matching models, order types, and validations and attributes to be added as the carbon space evolves. The CIX platform will also include safeguards to reduce counterparty risk and help establish norms for the industry. Our goal is to build a trusted and resilient carbon marketplace, providing the foundation for an innovative and robust international carbon economy.
