Carbon credit exchanges are the marketplaces that allow organizations to buy or sell carbon credits. Each credit represents one metric ton of GHG emissions avoided. These credits are usually sold within a compliance market (emissions trading schemes regulated by governments) or a voluntary market, where organizations trade with each other based on their own commitments to the climate change challenge.
Compliance markets are driven by government regulations that set limits (or a “cap”) on a company’s total allowable emissions of GHGs. Companies with a cap on their emissions must stay under this cap or face heavy fines. To do this, they use their own GHG reduction activities to generate carbon credits, which they then trade with each other. These credits are called allowances, and can be traded, sold or retired.
To ensure that allowances are generated fairly, regulators create a market that gives companies the option to purchase credits from other entities that have avoided emissions elsewhere. This is known as the carbon market, and it works just like a regular securities or commodities market in that anyone can participate. The credits are tradable, and there are many different types of projects generating them.
The two largest categories of carbon.credit exchange are avoidance and removal. Avoidance includes renewable energy projects but also forestry and farming projects that reduce greenhouse gas emissions by avoiding deforestation or wetland destruction. It could also include practices that limit GHGs from dairy cows or beef cattle or using different soil management techniques in farming to cut emissions from crop production. The removal category of carbon credits is broader and can be nature-based – including reforestation or afforestation, wetland preservation and biochar production – or technology based – such as direct air capture or carbon dioxide capture and storage.
While regulated carbon markets exist, the majority of carbon credits are traded in the voluntary market. This market is driven by a number of factors, including corporate social responsibility, ethics, and a desire to enhance their reputations. It is also fueled by entities purchasing offsets in advance of new regulations coming into force, where they are likely to pay less for their credits.
In this market, a credit’s worth is often highly subjective – influenced by the ideals of buyers and sellers as well as the supply and demand for the credits. To reduce this volatility, the industry has developed standard products – such as Xpansiv CBL’s Nature-based Global Emission Offset or ACX’s Global Nature Token – that help to make the trading process more transparent and easier for players. These labels ensure that the credits have certain basic characteristics, such as the type of underlying project, a fairly recent vintage and certification from a restricted group of standards.
For example, the Swiss retailer Coop sets a price of $150 per ton for its carbon credits and only accepts those from forestry projects that are Gold Standard-certified, benefit local communities and have an improved land management plan addressing social metrics such as gender equality or income generation.