A carbon credit exchange allows entities to purchase credits that represent a ton of reduced, avoided or removed carbon dioxide and other greenhouse gas (GHG) emissions. These credits, known as offsets, are then used by companies to compensate for emissions they cannot eliminate themselves. Once used to offset a company’s emissions, the credits are moved to a registry called a “retired” credit. The voluntary carbon market (VCM) functions outside of the compliance market, where companies that exceed their GHG limits are obligated to buy credits from the compliance market. Many of the same players are involved in both, but VCM does not have the same rules and penalties.
VCM players include project developers, brokers, traders and end buyers. Project developers set up environmental projects that reduce or remove GHG emissions from the atmosphere, ranging from large industrial-style projects like high-volume hydro plants to smaller community-based ones such as clean cookstoves. They may also generate co-benefits, which could be anything from saving endangered species to improving water quality or creating jobs.
Traders link supply and demand for carbon.credit exchange, and they can either buy credits directly from the project developer or sell them to a buyer in the form of a contract. They may also bundle credits into portfolios and sell them to a retail trader, who then resells them to the end buyer for a fee.
In order to verify the emission reductions that are claimed by project developers, the voluntary market uses third-party verifiers who inspect and approve a project’s methodology, financials and reporting. The verification process is managed by a number of standards, including the Gold Standard and Verra’s Verified Carbon Standard (VCS). The number of VCS accredited projects has increased steadily, but the market is still not as mature as it needs to be.
As companies make ever-increasing commitments to invest in carbon reductions, they need access to a mechanism that can support their efforts. The VCM is a key component of that. In recent years, a number of initiatives have emerged to improve the integrity of the voluntary market, ranging from trading infrastructure to new forms of project certification.
The Taskforce on Scaling Voluntary Markets suggests that centralized market infrastructure should be applied to the VCM, starting with a standardized carbon credit quality framework and a taxonomy of attributes that would be used to classify credits. This would increase confidence in the validity of carbon credits and help build liquidity in over-the-counter markets. It would also enable the development of a liquid reference carbon contract that could provide a daily price signal, facilitate risk management and encourage supplier financing. These are all steps toward building a robust and effective global carbon marketplace. This, in turn, would help to address growing concerns over the scalability of the voluntary market and ensure that more companies can actually realize their net-zero commitments. Several market initiatives have already emerged that are attempting to implement this framework. The CCX, which was launched in 2010, eventually failed, with a trading volume that was almost entirely populated by offsets.