Carbon credits are a unit of measurement for greenhouse gas emissions that are reduced, stored or avoided through projects that are certified to meet specific carbon reduction standards. They are traded on the spot market or in a range of voluntary carbon markets around the world. A carbon credit can be used to offset or reduce a company’s greenhouse gas emissions and help it reach its climate targets under a compliance or cap-and-trade program, and they can also be used to comply with international programs such as the Clean Development Mechanism and Article 6 of the Paris Agreement and regional ones like California’s Emissions Trading System (EU-ETS).
The first international agreement to cut CO2 was the 1997 Kyoto Protocol, which set a goal of cutting global emissions by 2012. This was followed by several national and regional programs that use caps and trades. The resulting markets are sometimes called “carbon pricing” programs, with 68 in operation globally.
Many of these are “cap-and-trade” systems, which set limits on how much a company can pollute and allow them to make money by buying and selling extra credits to offset their excess emissions. These credits are then able to be used by other companies that need them to offset their own pollution or achieve their carbon reduction goals.
A number of companies have developed businesses that help clients purchase, sell and manage these credits. These can include brokers and traders, project developers, carbon consultants, environmental services companies and banks. These companies can work with a number of different exchanges, some of which are regulated and others which are not.
One of the main reasons for this overlapping of roles is that there are specific rules and requirements when it comes to carbon markets that require an expert understanding to navigate. For example, there is a particular accounting methodology for each type of carbon project that must be followed to ensure its credibility. This can include anything from a planned forest’s ability to absorb CO2 and the number of credits it will produce over time, to how the carbon is verified. This is why the Verified Carbon Standard was developed by environmental and business leaders, as an assurance to buyers that they are purchasing valid carbon credit exchange.
With all these variables, a market based on carbon credits requires robust and resilient platforms that can support an increasing range of participants. Nasdaq’s trading technology matches buyers and sellers of carbon credit assets based on multiple parameters, so that buyers are purchasing credits that meet their specific needs and regulatory requirements. This helps to reduce counterparty risk and increase the likelihood of success for both parties.
In the case of the ADGM-ACX carbon credit exchange, this will be done by creating digital tokens for each carbon credit which are then custodised by a recognised clearing house, ACX Clearing Corporation, to ensure their security and validity. This will provide an efficient and secure way for businesses to offset their carbon footprint while supporting the creation of a new sustainable market.
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