What is Carbon Credit Exchange Market?

Carbon Credit Exchange Market

Carbon credit exchanges are markets where participants trade carbon credits in compliance and voluntary carbon markets. Compliance markets operate under obligatory systems, while voluntary initiatives are independently developed by businesses and individuals. Carbon credits are measurement units that “cap” emissions — or, more specifically, the amount of carbon dioxide emitted into the atmosphere. A company can create carbon offsets by investing in green projects or initiatives (whether natural or technological) that remove emissions from the environment. These are then sold to offset a company’s own emissions, which can occur during production, distribution or travel.

In the compliance market, governments set a limit on the amount of CO2 emissions companies are allowed to release each year, and companies that exceed this limit must purchase carbon credits from other market players. This is called a “cap-and-trade” system, and the number of available credits reduces each year, meaning that companies must continually find new ways to lower their emissions or risk fines and other penalties.

For example, if a company emits 100 more tons of CO2 than the cap allows for that year, they must buy carbon credits from another company to make up the difference. This process is also known as a “carbon leakage” program, because it is designed to help reduce global warming emissions.

The carbon credit exchange industry is dominated by two main types of exchanges: regulated and voluntary. Regulated carbon markets are created and operated under mandatory systemic regulation, and the credit’s underlying infrastructure is generally based on a foundation and credit model. The platform is built to support the exchange of standardized, high-quality carbon credits in compliance with regulatory and environmental standards.

What is Carbon Credit Exchange Market?

The voluntary market, on the other hand, is a growing and rapidly evolving market fueled by rising consumer awareness about climate change, increasing corporate net-zero goals and international environmental targets (including the Paris Agreement to limit global warming to 1.5 degrees Celsius). The platform is built for buyers and sellers who want to trade liquid, standardized carbon credits in an environment that enables them to meet their business, environmental and regulatory requirements.

Regardless of the reason for trading carbon credits, both marketplaces are a valuable resource for market participants. They allow for the creation of a large pool of potential carbon credit buyers, and provide an opportunity for companies to offset their own emissions and demonstrate that they are committed to environmental sustainability.

Carbon credit markets are governed by various regulatory and environmental frameworks, but they’re quickly moving toward a standardization of rules, a common timeframe for compliance, common methodologies for measuring, reporting and auditing, and a single set of quality thresholds for carbon credits. This could include core carbon principles and attributes that are hosted and curated by an independent third-party organization, as well as a standard attribute taxonomy to define additional, more detailed characteristics for the credits. This will enable market participants to trade in a more streamlined and efficient way, while reducing counterparty risk.

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