A carbon credit exchange is a market where traders buy and sell carbon credits. These can be purchased by organizations to offset their greenhouse gas emissions. A carbon credit is an environmental commodity that represents one metric ton of carbon dioxide removed. It can be retired after a certain number of years. To qualify for a retirement, the underlying project must provide additional environmental and social benefits.
A carbon credit is created through a project that reduces or eliminates the emission of carbon dioxide. These projects are generally either industrial or community-based. Industrial projects are larger-scale and produce large amounts of credits. However, community-based projects are typically smaller and localized. They are often more costly to certify, and therefore trade at a premium to other types of projects. Unlike industrial projects, community-based projects usually generate more co-benefits. The value of these carbon assets is determined by the type of project, the geography of the project, and the time it takes to deliver the asset.
The two major carbon credit exchanges are the Carbon Trade Exchange (CTX) and AirCarbon Exchange (ACX). CTX is an over-the-counter, member-based spot exchange that covers the African continent, Asia, and Europe. ACX is a DLT-based exchange that uses recent blockchain technology to create securitized carbon credits. The exchange also operates a digital warehouse to allow investors to manage and monitor their assets.
Tokenization of carbon.credit exchange improves market liquidity. A token is a digital representation of a tonne of carbon offset. XCO2 tokens are a publicly auditable ledger that provides cryptographic proof that the tonne was offset. The token’s price fluctuates based on the current market price of a metric ton of carbon credits. The supply of these tokens is linked to the amount of carbon credits held by the carbon market exchange. The exchange has a minimum trading volume of 100 tons of CO2e.
The AirCarbon Exchange has launched in Singapore in 2019. Its client base comprises more than 130 organizations and has raised $3.6 million from three rounds of funding. Its clients include airlines, hotels, and oil companies. The carbon exchange is backed by Deutsche Borse.
Verra, a nonprofit group, has set the industry standard with its Verra Carbon Standard, which includes a registry system and independent auditing. The organization has registered 1,750 projects worldwide and verified almost 796 million carbon units. The Verra Carbon Standard is the most widely used standard for the validation of carbon credits.
While traditional exchanges can be complicated to operate, the use of blockchain technology to construct secure carbon credit exchanges is emerging. Many buyers and sellers of carbon credits use tokens to facilitate transactions. Tokens are stored on the blockchain and are automatically executed when the terms of the agreement are met. This enables both parties to maintain the integrity of the contract and avoid the need for intermediaries.
Another way to trade carbon is through a futures exchange. Futures exchanges allow longer-dated deliveries, while also facilitating spot deliveries. These markets can be beneficial to end-buyers who are interested in financing their own carbon project. Alternatively, some entities buy directly from developers of carbon projects.
