The Importance of Carbon Credit Exchanges

Importance of Carbon Credit Exchanges

In order to limit the rise of global temperatures to 1.5 degrees Celsius, companies and other organizations need to reduce their net greenhouse gas emissions drastically. This can often be done by adopting new technologies, energy sources and operating practices, but for those who cannot achieve the reductions required on their own, a robust, effective voluntary carbon credit marketplace is crucial. Such a marketplace can transmit buyer demand signals to carbon credit sellers, helping them increase supply of credits for buyers that want to meet their emissions targets.

While the marketplaces for carbon credit exchange purchased voluntarily are crucial, there is also an increasing need to encourage companies to invest in projects that reduce their emissions on a more comprehensive scale. These types of projects can range from reforestation to bioenergy and repurposing old industrial sites, among others. The resulting emissions-reduction projects can provide other benefits including biodiversity protection, pollution prevention and public health improvements. These projects can require substantial investment and therefore need private financing. A well-functioning voluntary carbon credit market can help to drive private financing for these projects, encouraging investment into the innovation necessary to lower the cost of emerging climate technologies.

These two different marketplaces for carbon credits operate in parallel to each other, with some countries and industries implementing one while others are implementing the other. Most of the large carbon credit exchanges are based on a traditional commodities trading framework, with buyers and sellers communicating through brokers, or via over-the-counter deals. However, a number of new, high-tech carbon credit exchanges are growing as the need for more sophisticated carbon credits increases.

The Importance of Carbon Credit Exchanges

Carbon credit prices are determined by a variety of factors, from the quality of the underlying project to the geographic location and vintage of the credits (typically, the older the credit the cheaper it is). Additionally, if a carbon project also helps to meet certain of the United Nations Sustainable Development Goals (SDG), those SDG-compliant credits will usually be at a premium to non-SDG compliant carbon credits.

While standardized products, such as those offered by CBL and Singapore-based AirCarbon Exchange (ACX), are preferred by traders that want to reduce transaction costs, many end buyers prefer non-standardized products to ensure the credit they purchase meets their specific requirements. For example, some end buyers will only buy Gold Standard-certified carbon credits to ensure that the emission-reduction projects that generated the credits are truly reducing greenhouse gas emissions.

The carbon credit marketplaces that use Nasdaq’s trading technology match buyers and sellers based on multiple parameters, ensuring that buyers are purchasing credits that meet their specific needs and regulatory requirements. Our scalable platform means that the exchanges can be easily expanded to accommodate additional asset types as the marketplace evolves. By offering the ability to purchase credits from a wide variety of quality-certified projects, Nasdaq can help reduce counterparty risk for all players in the market and facilitate a more efficient marketplace. We can also help to establish market norms based on best practices in the capital markets, so that intermediaries can understand the risks and rewards of trading carbon.