A carbon credit exchange could reduce emissions by bringing projects to market that capture or offset a company’s greenhouse-gas (GHG) footprint. A number of challenges, however, could hamper the scale and growth of these markets. For instance, potential supply may be limited by the number of projects that can get financing and developed. In addition, some project types have high risk and lengthy lag times between investment and production of credits. Finally, the overlapping roles of brokers and financiers mean that buyers and sellers often have a difficult time matching their needs.
A credit represents an ownership claim to one metric ton of reduced, avoided or removed GHGs that can be traded, sold or retired. Companies or individuals that must comply with regulatory emissions caps can use carbon credits to offset the difference between their own emissions and what they have been allocated. This is called buying “compliance carbon.”
Regulated emissions trading markets exist in a few countries including California. Under these programs, companies must purchase a certain percentage of carbon credits to stay below their allowed emissions cap. These carbon credits can be used in a voluntary market as well, where companies buy them to meet their corporate social responsibility or environmental claims.
The voluntary carbon.credit exchange is driven by a range of motivations including corporate social responsibility, ethics, and the desire to enhance a company’s reputation. The market also provides an opportunity to buy credits before new emission reduction requirements are imposed. Unlike the compliance carbon market, the voluntary market operates largely unchecked by government or other regulators. Instead, the oversight is provided by a number of respected standards organizations that validate carbon credits.
Standardized products help to simplify and speed up the trade of carbon credits. For example, CBL and ACX have created standard label products such as the Xpansiv N-GEO and the Global Nature Token to provide guarantees that certain attributes are met. These include a specific type of underlying project, a relatively recent vintage and certification from a restricted group of standards.
However, despite these efforts, the current structure of the carbon credit marketplace is complex. In addition to a proliferation of different project types, the quality and scope of GHG reductions and removals are widely varied. For example, many credits are generated by plant-based projects that reduce or avoid GHGs through energy efficiency and renewables. In contrast, some are derived from forest management activities that increase carbon sequestration in forests and/or soils, but do not reduce direct GHG emissions. These are known as “non-direct” emissions reductions and are less attractive to some buyers. The overall complexity of the carbon credit marketplace can be intimidating to potential investors. The creation of a clearer and more consistent standard will make it easier for buyers to sift through a large and diverse supply of credits, identify the best investments, and achieve their climate goals. This could be done through the development of core carbon principles that would standardize key features of a credit and allow for efficient matching of buyers and sellers.