Carbon credit exchange securities are derivatives that represent the rights to buy or sell the emission reductions produced by a certified project. These projects can range from energy efficiency, forest management, waste to power and other types of carbon capture. The demand for these credits is growing due to increasing focus on businesses reducing their emissions and potential mandates from various nations.
The global carbon market was worth $211.5 billion in 2019 and is expected to grow to $2.4 trillion by 2027. This significant increase in demand for carbon credits is mainly driven by the increased emphasis on companies reducing their emissions and by the possibility of mandatory emissions trading systems from various nations.
These new carbon.credit exchange will need to be characterized by high liquidity, sufficient financing and adequate risk-management services. In the case of a carbon credit exchange, this will need to include reliable reference prices for a variety of different attributes and project types. These prices will then be used as a basis for the pricing of over-the-counter trades.
To link supply and demand, carbon credit exchanges will need to develop a robust infrastructure for trading, post-trade and data. This will include resilient and scalable exchange technology that enables the listing of reference contracts (spot or futures) that can be used as a daily price signal for over-the-counter trades. It will also need to provide clearinghouse and meta-registry services that enable post-trade activities and ensure the integrity of the market. Finally, it will need to offer a sophisticated taxonomy for additional attribute classes and standards that can be used to verify the quality of carbon credits and VERs.
Typically, carbon credits will be purchased by traders and financial players who can then resell them to end buyers that are seeking to offset their own emissions. These end buyers may be large corporations aiming to reach net-zero emissions targets or governments looking to meet their climate change obligations. The sale of carbon credits by these end users will need to be transparent and governed by regulations, in order to avoid accusations of greenwashing or unfair competition.
In order to do this, the carbon credit market will need a clear set of market norms that can be used as a guideline for the various stakeholders in the industry. In addition, these norms will need to be based on best practices in the capital markets, in order to facilitate adoption by intermediaries.
A trusted and resilient market operator that helps create market norms will reduce the risk of manipulation and fraud in this dynamic marketplace. It will also enable the development of efficient market infrastructure that can scale as the carbon credit market grows.
Mikkel Larsen, interim CEO of Climate Impact X and Virginie Barbot, Head of Southeast Asia and Pacific, Marketplace Technology, Nasdaq join host Jill Malandro to discuss how a reputable platform can help build trust and increase liquidity in this emerging market. Nasdaq’s advanced trading technology matches buyers and sellers based on multiple parameters, ensuring that carbon credits sold are backed by legitimate sources. This can help reduce counterparty risk and allow businesses to acquire the specific attributes required for their compliance goals and regulatory requirements.