A carbon credit exchange is a trading system that allows entities to offset their greenhouse gas emissions by purchasing credits from projects that reduce or sequester those gases. One tradable credit represents a tonne of CO2 or an equivalent amount of another greenhouse gas reduced, sequestered or avoided.
The carbon market is a large and complex global system that includes many players. There are several ways to describe the different players and their relationships to each other, but the most basic way is to consider two broad groups of participants: traders and end buyers. Traders buy and sell carbon credits to/from end buyers, often charging a fee. These players are sometimes referred to as brokers, and they make up the majority of trading volumes on carbon markets.
End buyers are companies or individuals who purchase carbon credit exchange to offset their own emissions and meet environmental regulations. These end users may be regulated, or they may be part of a voluntary scheme such as the Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA).
There are a number of ways to purchase carbon credits: through exchanges, through broker-dealers, directly from project developers or through direct marketing programs. Each of these purchase methods involves a risk profile that is unique to the buyer, and it is important for the buyer to understand this before entering into any transaction.
When it comes to putting a price on carbon, the process is complicated by the wide range of attributes and factors that can impact the value of a particular credit. These factors include the type of underlying project that generated the credit (reforestation, wind, solar, biomass, landfill gas capture), the geography in which the project is located and its vintage, which refers to how long it has been in operation.
A key step in improving the value of carbon credit is to provide a clear price signal to buyers. This can be done by developing a framework that allows buyers to register their commitments to reduce greenhouse-gas emissions and/or their intent to purchase carbon credits from future projects. These commitments can be used to drive demand in the short term and provide incentives for project developers to increase their supply of tradable credits.
The next step in improving the value of carbon credit is providing a robust, liquid marketplace that is transparent and fair for all participants. This can be achieved by implementing anti-money-laundering and know-your-customer guidelines to stop fraud, and establishing a governance body to ensure the eligibility of market participants, supervise their conduct, and oversee the functioning of the market.
Finally, it is essential to develop a robust and diverse portfolio of carbon products that can be traded on the marketplace. This can be accomplished by enabling new asset types to be added as the market evolves and providing an easy-to-use platform that provides users with a customizable experience. For example, the carbon market-leading CIG Markets platform from Nasdaq Marketplace Technology enables the addition of new asset types and offers a flexible set of matching models and algorithms, order types, validations, attributes and safeguards.