Carbon Credit Exchanges Be Sold
Carbon markets are trading systems that allow companies and individuals to compensate for their greenhouse gas emissions by purchasing credits from entities that reduce or remove those gases. Each tradable carbon credit represents one tonne of reduced or avoided GHGs. The credits are derived from projects that are designed to reduce carbon dioxide emissions, and they can be used for compliance with government emissions reduction targets or voluntary emission offset programs.
The market for carbon credit exchange is growing rapidly, with many new players entering the space. Some are large companies, such as tech giants and airlines, that are embracing net-zero climate goals. Others are financial institutions that want to help reduce climate risks, and still more are sovereign governments seeking ways to cut their own greenhouse gas emissions.
While there are many ways to generate and sell carbon credits, the most popular is through a carbon trading allowance, or CTA, which is awarded by national governments to companies or project developers that achieve GHG reductions. The CTAs are then sold on a carbon exchange to offset companies’ emissions. This is a key feature of the Kyoto Protocol and its successor, the Paris Agreement.
How Can Carbon Credit Exchanges Be Sold?
These carbon credit schemes were designed to incentivize companies to invest in reducing their emissions. For example, a company may earn a carbon trading allowance by investing in a renewable energy project, such as a wind farm or solar power plant. In turn, the allowance is resold on a carbon exchange to buyers that need to meet their emissions reduction goals under the Paris Agreement or Kyoto Protocol.
As carbon markets continue to grow, there is a need for greater transparency and a more efficient means of transferring credits between traders and end buyers. The current approach is for traders to buy carbon credits from a carbon broker, which can then market them directly to an end buyer, often with a fee. In the case of Aircarbon, which was recently named the best carbon marketplace (VCM) in Environmental Finance’s 2021 Carbon Exchange Rankings, brokers make up a large percentage of volumes transacted on the platform.
Another emerging technology in the carbon credit market is tokenization, which allows for the creation of a virtual asset that can be bought and sold on digital exchanges like other digital currencies. These tokens represent a pool of credits that is tracked by a blockchain. Each token has the same information as a physical carbon credit, including third-party certification details, transaction records, and monitoring reports. Tokenization aims to improve liquidity and create a more transparent market.
While a higher level of liquidity is necessary for the carbon market to grow, it must be balanced with a focus on environmental integrity. This is why the leading token efforts are now refocusing their efforts to ensure that quality is not sacrificed in order to promote liquidity. It is a similar situation to that of lemons in the used car market: bad quality can drive out good quality.