Carbon Credit Exchanges

As the crypto world becomes mature, blockchain technology has started to make its way into one of today’s hottest markets: carbon credits. These are digital tokens that represent a verified emission reduction from certified climate action projects that reduce, remove, or avoid greenhouse gas emissions (GHGs). To facilitate the trading of these tokens, exchanges are using blockchain networks to offer a new platform for carbon traders, buyers, and sellers.

These platforms are called carbon credit exchanges and they work by offering an online marketplace for businesses, investors, stockbrokers, and those who work on carbon projects to buy and sell emissions reductions. These platforms use the blockchain to store, transfer, and verify the ownership of carbon credit exchange. By using the blockchain, these exchanges are able to eliminate intermediaries, speed up processes, and improve transparency in carbon markets.

The global landscape of carbon credit markets has developed quickly, leading to a patchwork of regulation and standards. For example, in the voluntary carbon market (VCM), companies purchase carbon credits to support voluntary claims such as their commitments to achieve net-zero targets or to contribute to emissions reduction projects. These claims are verified in a variety of ways, including through certificates issued by the carbon credit trading system (CCTS).

Are Carbon Credit Exchanges Still Working?

While a carbon market may appear complex, it’s important to remember that it is only an instrument that helps move us towards our goal of reducing GHGs. Ultimately, the goal is to create a rapid shift away from fossil fuels and into a low-carbon economy. However, this change will take time.

For this reason, a number of carbon credit exchanges are trying to make it easier and faster for companies to trade carbon credits by creating standard products. These products combine a core contract, which is based on core carbon principles and standard attributes, with additional project-specific attributes that are defined according to a taxonomy and priced separately.

A recent study published by McKinsey & Company found that these standard products could help simplify and accelerate the trade of carbon credits in the VCM, making it easier for companies to meet their GHG emissions targets or invest in low-carbon projects. This, in turn, would allow them to better address the challenges of accelerating this transition and achieve the goals of the Paris Agreement.

Currently, the most common method for buying and selling carbon credits is through a regulated carbon market, such as Europe’s Emissions Trading System or California’s cap-and-trade program. Under these programs, private companies are given a maximum allowance of emissions, which is reduced periodically. If a company emits more than its limit, it must buy credits from other companies that have already reduced their emissions. This system is designed to incentivize companies to find innovative ways of reducing their emissions. It is also expected to provide significant financial benefits for businesses that adopt clean technologies and sell their excess credits. The report authors suggest that a similar approach can be used to increase efficiency in the VCM and scale up its use.