How Does the Trading Process Work in a Carbon Credit Exchange?

The carbon credit exchange is the mechanism through which a company can purchase carbon credits from entities that reduce, sequester or avoid greenhouse gas emissions. One tradable carbon credit represents the equivalent of one tonne of CO2 or other greenhouse gases reduced, avoided or sequestered. Carbon markets are a key part of the solution to humanity’s greatest challenge: climate change.

Carbon credits are marketable permits that reflect a tonne of CO2 or other greenhouse gas that a company is allowed to emit each year. They are commonly used in a regulatory context known as a cap-and-trade program, where businesses that exceed a set amount of emissions must offset their excess with credits from other participating companies.

A number of environmental commodity exchanges - mostly in North American and Europe - list carbon credits for sale and work with registries to enable trading. There are also a number of voluntary carbon markets that facilitate trades outside the regulated environment.

When purchasing carbon.credit, buyers will want to consider the type of project they are buying from and how much time and effort they can devote to evaluating the quality of these credits. For example, community-based projects, which are designed and managed by local communities or NGOs, produce smaller volumes of credits that can be more difficult to verify. However, these projects can often offer additional co-benefits that can meet the UN’s Sustainable Development Goals and therefore may be more attractive to buyers.

Another important factor in a carbon credit’s value is its permanence. The ability to demonstrate that the carbon reductions in a credit will not be reversed is often essential, especially for forestry projects, where forest fires and other natural events can lead to an abrupt reversal of carbon removal. Often, these projects will allocate a portion of their credits to a buffer pool that can’t be traded on the voluntary market. This ensures that there are enough credits available to make up for any future reversals.

The process of bringing a carbon credit from project idea to retirement can take as little as a year or as long as over a decade, but it is an important investment in tackling humanity’s biggest challenge. Every tonne of greenhouse gases that is kept out of the atmosphere helps to slow the warming trend and protects the planet for future generations.

As the voluntary carbon market develops, it will be important to create a resilient infrastructure that can support high volumes of trading. This includes developing reference contracts that reflect a limited and consistently defined set of carbon attributes. This will help match buyers with sellers and ensure that only credits that represent real, permanent reductions are sold. This will help to ensure that a voluntary carbon credit market can continue to be a valuable tool for climate change mitigation and to contribute to the global effort to reduce emissions. It will also make it easier for regulated markets to rely on this market as they move towards net zero emissions goals.