In a carbon credit trading market, companies that emit carbon dioxide (CO2) can buy credits from project developers to offset their emissions. The market sets a price for these credits, which is based on their ability to reduce CO2 in the environment, and that price drives investment decisions and innovation. The regulated carbon market, which accounts for 90% of the global value, is known as the EU Emissions Trading System (EU ETS). The voluntary market, which includes the CDM, is smaller but growing rapidly, with an annual growth rate of 35% over the past five years.
There are many reasons for the rise of the carbon.credit exchange market, including increased demand from companies that want to meet their net-zero emissions targets, and a new generation of investors looking for opportunities in the climate space. These investors are joining the likes of tech companies, airlines and oil and gas majors, which have been buying carbon credits for some time.
The current state of the carbon credit trading market is fragmented, with multiple platforms attempting to improve data quality and visibility. However, most are commercially oriented and often lack a clear underlying quality standard. Additionally, many of these platforms are not linked to one another and do not share data. This limits the market’s integrity and makes it vulnerable to fraud and money laundering.
Several initiatives have been proposed to improve the functioning of the carbon credit trading market, including the creation of a resilient infrastructure and the introduction of a transparent and verifiable daily price signal. These improvements will help to increase the availability of information for carbon credit buyers and enable the development of structured finance products for project developers.
An essential component of this infrastructure will be a set of core carbon principles and a standardized attribute taxonomy. These features will ensure that credits adhere to a defined standard of environmental and market integrity. They will also allow for the efficient matching of buyers and sellers.
Another important aspect of the carbon credit trading market is a digital process for verifying projects and credits. This will lower issuance costs, shorten payment terms, accelerate credit issuance and cash flow for project developers and reduce risk of misreporting. It will also increase the credibility of corporate claims related to the use of carbon offsets.
In addition to the above, it is necessary to establish further guidance on the appropriate use of carbon credits in order to avoid disincentivising efforts to mitigate emissions in the first place and clarify the use of offsetting in corporate claims. This will be achieved by further strengthening the existing global standards that govern the verification and certification of the credits being traded.
Platts collects bids and offers from participants on our carbon trading platform for certificates issued under a range of standards, such as the Gold Standard, Climate Action Reserve, Verified Carbon Standard and the Architecture for REDD+ Transactions. These credits are listed on the platform to satisfy the demands of cashed up carbon credit buyers.