Carbon credit exchanges are emerging as an alternative to traditional carbon market sourcing. They link supply and demand through a series of brokers and retail traders who purchase large amounts of credits directly from the supplier, bundle them into portfolios and sell those portfolios to end buyers. These retailers often take a commission and have no direct control over the quality or nature of the underlying carbon project, but they can ensure the credits are traded at a price that reflects market value.
is a complex ecosystem that includes several submarkets: the voluntary carbon market, compliance carbon market and non-compliance (or black market) carbon markets. In the voluntary carbon market, companies and other organizations buy or sell carbon credits as a way to offset their emissions.
Voluntary carbon markets are increasingly gaining acceptance among the public as an alternative to the regulated compliance markets and are becoming an important channel for reducing greenhouse gas emissions. These markets are open to all sectors of the economy and offer a significant degree of flexibility.
These markets typically operate under a cap-and-trade system, where companies who exceed their emissions can trade credits in order to avoid a financial penalty. A carbon credit is the equivalent of one metric ton of carbon dioxide that can be traded or sold.
Compliance carbon markets are regulated under government-established caps on greenhouse gas emissions and must adhere to strict regulations. These markets have the same standardized products and contracts as the voluntary markets but they tend to have more limited liquidity because of higher transaction costs and the need for membership, clearing and trading fees.
Liquidity is essential for the success of a market. This can be cultivated through the creation of no/low barriers to market entry, a large number of regular market participants, low transactions costs and standardised contracts.
Traders and end buyers also need a clear pricing signal for carbon credits to be purchased and traded. This allows them to protect themselves from potential accusations of greenwashing and ensure that the underlying projects they purchase are of the highest quality.
However, a recent study by Amy Pickering and her co-authors at Stanford Woods Institute for the Environment found that carbon financing is not always transparent and that no one can know for sure whether or not a project’s benefits are actually delivered. The authors recommend that third-party monitoring be used to assess the effectiveness of any carbon-financed scheme, especially those focused on improving water quality and health in low-income countries.
Another major problem with the traditional carbon market is its lack of transparency on the quality and diversity of carbon credits. Various accounting and verification methods vary, and the credits’ co-benefits often are not well defined.
This lack of clarity can lead to demand-supply imbalances in the carbon market. This imbalance creates a sense of risk in the market, which can discourage responsible conduct and foster a climate of distrust between carbon emitters. The market also faces a high risk of zombie credits, which are once buried credits that are traded by traders motivated primarily by profit. These “zombie” projects have flooded the carbon market and are amplifying concerns about its potential for meaningful emissions reductions.
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