The world needs to reduce greenhouse gas emissions dramatically if it is to limit global warming to 1.5 degrees Celsius, as agreed to in the Paris Agreement. Many companies will need to use carbon credits to supplement their own abatement efforts in order to reach net-zero emissions by 2050, and a robust voluntary carbon market would make it easier for them to locate trustworthy sources of carbon credits. At the same time, such a market would also help transmit clear signals of buyers’ demand to encourage sellers to increase supplies.

Carbon markets are trading systems where one tradable credit equals one ton of CO2 or other greenhouse gas reduced, avoided, or sequestered. Credits are generated by entities that capture, reduce or offset a company’s or individual emissions. These projects are generally financed by the sale of carbon credit exchange, which are then traded in the market.

Most of the trading in carbon markets today takes place in compliance programs that are part of national, regional and international policies or regulations. The majority of these markets are run by governments, with the exception of California’s state cap-and-trade program. In a compliance market, governments set limits on how much a business can emit annually, and those that exceed their allowance must buy carbon credits from others to stay below their cap.

Credits may be derived from any project that reduces, avoids or captures greenhouse gases (GHGs). The most common credits come from forestry and agricultural practices, such as reforestation or plant-use change. Other types of projects include landfill-gas capture, industrial sludge-to-energy and natural gas-to-electricity conversions.

The potential supply of these credits varies considerably, depending on the type of GHG reduction and the underlying technology. Some types of projects are more resource-intensive than others, resulting in long lag times between the investment and the sale of credits. In addition, some projects are not commercially viable and require significant subsidies.

As a result, the current supply of carbon credits in the voluntary market is limited. However, the growth of this market is being driven by a combination of factors, including corporate net-zero goals and interest in meeting the requirements of the Paris Agreement.

To ensure the integrity of carbon markets, the industry is working to create a standard for carbon credits. The standard should establish core carbon principles and a taxonomy of attributes that can be used to classify credits and to generate daily price signals. These standards will be critical for the development of liquid markets and the growth of supplier financing. Nasdaq Marketplace Technology is well-positioned to provide a foundational platform for the creation of an effective, transparent and secure carbon credit exchange. For more information on how to launch a new exchange, contact us.