Regardless of the specific emissions target that a company or organization aims to achieve, many businesses will need carbon credits to make up for the difference. These offsets can be purchased from a variety of sources, including direct carbon reduction efforts, reforestation projects and renewable energy initiatives.
The global carbon market has been growing at a rapid pace over the past few years as companies, governments and individuals seek to reduce greenhouse gas emissions. The market is expected to grow at a CAGR of 31% over the next two decades, reaching a valuation of $2.4 trillion by 2027.
A carbon.credit exchange is an online marketplace where participants buy and sell emission reduction credits or permits to reduce emissions. This type of market is known as a cap-and-trade market and can be found in various jurisdictions around the world.
Carbon credit exchanges often function like commodities trading platforms, with a bid/offer exchange and Mark-to-Market system that allows market participants to manage assets within their portfolios without relying on an intermediary. This infrastructure enables trades in standardized contracts, speeding up the execution and settlement of deals.
In voluntary markets, which are largely unregulated and have a high level of volatility, there is a significant need for liquidity. Voluntary credits are heterogeneous, with different attributes such as the underlying project or region where they were performed, affecting the price of these credits. This heterogeneity makes it difficult to match buyers with suppliers, and creates a lack of confidence in the integrity of the marketplace.
One way to improve the liquidity of voluntary carbon markets is to tokenize them, a process that stores all the important details about the underlying projects and the credits themselves on a blockchain. This can lower issuance costs, shorten payment terms and increase cash flow for the developers of the project.
These tokens also provide the necessary transparency that can make voluntary markets more attractive to companies and institutions that are seeking to offset their emissions. For example, a group of airline operators that buys carbon credits to offset their emissions can use those credits to meet their own voluntary goals or to satisfy compliance requirements with government mandates.
The most widely used standard for verifying voluntary carbon credits is the Verified Carbon Standard, developed by a Washington D.C.-based nonprofit group that focuses on improving quality assurance in voluntary markets. This standard includes accounting methods specific to a project, independent auditing and a registry system for the credits.
Another important standard is the Clean Development Mechanism, which sets standards for renewable energy projects that are designed to produce zero net emissions. Its goal is to ensure that companies and institutions have access to sustainable, clean-energy alternatives.
This standard is a major driver behind the growth of carbon trading in the voluntary market. It can help companies find reliable, trustworthy sources of credits to offset their emissions and facilitate the exchange of those credits in a secure, transparent environment.