Carbon Credit Trading

Carbon credit trading allows companies to manage their environmental impact by buying or selling credits that represent a standardised unit of carbon dioxide (or equivalent greenhouse gases) reduced, avoided or removed from the atmosphere. These carbon credit exchanges are a key element of both voluntary and compliance carbon markets, which have grown organically to meet demand from organisations seeking to reduce their carbon footprint and adhere to regulatory emissions targets.

Carbon market participants can trade both physical carbon allowances and futures contracts on a commodities exchange. By establishing a carbon credit exchange market, regulators can set a price for carbon and incentivize investments in technologies to capture or avoid carbon emissions.

Many of the world’s largest companies purchase carbon credits from suppliers in order to comply with mandatory emissions reduction regulations such as those in Europe’s Emissions Trading Scheme (ETS). The other main carbon credit market is the voluntary one, which has been growing rapidly to help businesses meet their own sustainability goals and to support carbon mitigation projects around the globe.

What is Carbon Credit Trading?

The voluntary carbon market is highly heterogeneous, with each credit displaying numerous attributes that affect the credit’s price. Buyers value these attributes differently, leading to a complex pricing environment. Matching a carbon credit’s supply with its buyers is a time-consuming, inefficient process that often takes place offscreen, through private conversations and bilateral deals.

In contrast, a robust carbon credit exchange can bring together large volumes of buyers and sellers in a transparent and efficient trading environment. The exchange can create standardized products that ensure some basic specifications are respected, such as the type of underlying project and its fairly recent vintage. This can make it easier for traders and financial players to understand their exposures and limit the risk of greenwashing accusations.

Both Xpansiv CBL and ACX are creating such exchanges, with the former introducing its new standardized product suite and the latter offering its first dedicated voluntary carbon market (VCM). These VCM products – which are available for both forward and spot delivery – allow end users to look at the specific characteristics of each underlying project, ensuring that the credits they purchase are truly green. In addition, they can also weed out non-greenwashing claims from fraudulent carbon offset providers that have not properly verified their projects and validated their emissions reductions.

By combining their knowledge of carbon markets with Nasdaq Marketplace Services Technology, the companies behind these exchanges are creating robust platforms that can adapt to the evolving needs of carbon market participants. For example, the platforms can be designed to support multiple matching models and algorithms as well as order types and validations that can scale up or down based on transaction volume. They can also be designed to enable the introduction of new asset types as carbon market participants demand them. The platform can also be adapted to the specifics of carbon credit market protocols by supporting additional verification methods and attribute taxonomies, enabling a core carbon standard to be introduced into the market.