A carbon credit exchange is a marketplace where companies can buy or sell emission reductions. Also called carbon offsets, one credit represents a reduction in carbon dioxide-equivalent emissions somewhere else that compensates for a company’s own greenhouse gas emissions. The credits are vetted by governments or independent certification bodies to ensure they represent a credible, measurable amount of greenhouse gas reduction.
Carbon credits are often issued under what is known as a “cap-and-trade” program. Regulators set a limit on the total amount of carbon emissions allowed each year, and then create a market where companies can trade with each other to stay below that cap. This allows companies to keep producing their goods and services while still being environmentally responsible.
Electric utilities, refineries, and factories that produce more than a certain amount of carbon each year must enter a regulatory market to comply with environmental laws. Once they do, the organization can purchase a number of carbon credits to make up for the additional amount of emissions it produces that year. The carbon credits serve as a “permission slip” to emit up to a specific level of carbon dioxide that year, and then the company can sell any excess credits to other organizations.
While a carbon credit exchange can be generated in a number of ways, the vast majority of them come from what is known as a certified project. This is a project that has been independently verified by an independent body as reducing carbon emissions through a variety of mechanisms, such as reforestation or methane capture and storage projects. The verified projects are then marketed to other organizations, such as companies that want to reduce their own emissions, by a number of different brokers and market participants.
The carbon credit market is a global, interconnected network of buyers and sellers that can be broken down into five distinct parts. The first is the upstream market, which consists of regulators and other regulatory agencies that oversee carbon markets. The second is the market participants who buy and sell carbon credits, or carbon allowances. This includes the companies that need to purchase carbon credits in order to comply with environmental regulations, and it also includes companies that are seeking to offset their own emissions. The third is the carbon project developers that generate and market carbon credits. These include reforestation and methane capture and storage projects, and it is these that produce most of the verified carbon credits in the marketplace.
The final part of the market is the voluntary market, where businesses and individuals purchase carbon credits to help mitigate their own emissions. This market has become very popular, as many companies have made commitments to reduce their emissions or are trying to meet environmental standards in their supply chain. The voluntary market is also where the majority of the carbon credit trading takes place, and it is here that the biggest market growth is expected over the forecast period.
