Are Trade Carbon Credits Effective?

In a world where countries are struggling to meet their climate goals, the development of a large and effective voluntary carbon market is seen as a critical part of accelerating action. These markets can drive capital to projects that reduce emissions and thereby help reach net-zero and net-negative emission targets.

The trade carbon credits market has several components that can be strengthened to make it more effective. For instance, a digital process could lower issuance costs, shorten payment terms, accelerate credit issuance and cash flow for project developers, allow credits to be traced and improve the credibility of corporate claims related to the use of offsets.

Verification methodologies, which ensure that the project has met its objectives and complied with legal requirements, are an important component of a well-functioning carbon market. The process should be transparent, rigorous and cost-effective. This includes using third-party verification organizations, which would ensure that projects are in line with quality thresholds defined by a third-party organization, known as a standards body.

A robust and resilient infrastructure is also an essential building block for a successful market. Such infrastructure enables the listing and trading of reference contracts on exchanges, supports post-trade activities and provides counterparty default protection. It can also improve price-risk management and the growth of supplier financing.

Resilient and scalable infrastructure will be key to making a trade-only carbon market efficient. It should include resilient clearinghouses and meta-registries that can support post-trade activity. It should also provide liquidity in the form of liquid reference contracts, which would enable buyers to monitor the cost of their offset needs and make informed decisions about purchasing credits from suppliers.

In addition to providing a framework for a voluntary carbon market, the infrastructure should be built on an open and collaborative foundation. This would help attract participants and encourage participation in the system. Establishing clear and consistent demand signals will also be an important factor in ensuring the success of these markets. It will allow suppliers to make informed decisions about which projects they are willing to invest in and what supply is available on the market. These demand signals would also help encourage investment and lending.

To be effective, a voluntary carbon market must ensure that a wide range of credits are issued and traded on an even playing field. This can be achieved through core principles and an attribute taxonomy that set quality thresholds for credits. It should also be supported by a robust and scalable infrastructure that facilitates the development, listing and trading of these reference contracts, as well as the creation of a reliable and comprehensive data network.

As the global economy transitions to a low-carbon and circular economy, there will be increasing pressure on companies to disclose their aggregate emissions. As such, a voluntary carbon market that rewards firms for their firm-wide emissions rather than just individual project-based emissions may align with future regulations that require such reporting.

Voluntary carbon markets are in their early stages, and there is a great deal of work to be done before they can be fully developed. The Taskforce on Scaling Voluntary Carbon Markets, established by the Institute for International Finance (IIF), has identified six areas that can be addressed to promote the scale-up of the voluntary carbon market: