How Do Carbon Credit Exchanges Actually Work?
Carbon Credit Exchanges Actually Work
Carbon credit exchanges link buyers and sellers of carbon credits – which are essentially permission slips to emit one ton of greenhouse gases – through an online marketplace. The carbon credits can come from a variety of sources, such as forests, land restoration, agriculture, and energy efficiency projects. Buyers, such as companies aiming to offset their emissions, purchase the carbon credits from these projects in order to reduce their environmental impact. The sellers of the credits earn a revenue from their sales, which is usually shared between the project developer and the middlemen, who bundle the carbon credits into portfolios for sale to end-buyers.
A number of environmental commodity exchanges – mostly in North America and Europe – have set up carbon credit trading platforms to facilitate the transactions. These platforms are similar to those used to trade other commodities such as oil and gas, and include brokers and retail traders who purchase large volumes of carbon credit exchange from several different sources, bundle them into portfolios, and sell them to end-buyers for a fee. The quality of these portfolios, however, is largely determined by the quality of the projects in which the carbon credits are generated.
The bulk of the market for carbon credits is known as the compliance market, where regulators put a cap on the amount of emissions that industries can release each year. Businesses then turn to this market to buy credits to stay below the cap, or they can pay a penalty comprised of fines and extra taxes.
How Do Carbon Credit Exchanges Actually Work?
These markets are important because they encourage companies to innovate and find ways to reduce their emissions. They also help reduce the cost of meeting climate change goals, a key consideration for governments and corporations attempting to meet the UN Sustainable Development Goals (SDGs).
Despite these benefits, concerns about the integrity of the voluntary carbon market remain a significant barrier to its growth. A lack of price transparency makes it difficult for buyers to know whether they are paying a fair price and for credits that represent real emissions reductions. And the underlying projects often struggle to generate enough revenues to maintain operations, especially when prices for their credits are below what it costs to operate them.
Gold Standard aims to address these issues by advocating for a clearer pricing signal that more accurately reflects the true cost of carbon and the value delivered in beyond-carbon development benefits, while providing an incentive for investors and project developers to continue to build high-quality projects. To do this, we must create a transparent and verifiable process for project registration and credits issuance, one that is based on a robust set of accounting methodologies tailored to each type of project, independent verification and auditing, and a standardized registry system.
With these steps in place, the market for carbon credits can deliver the benefits we need to ensure a safe climate while still providing economic incentives for companies to continue to innovate and lower their emission profiles.